2013 FINANCIAL INSTITUTIONS OVERVIEW FOR KNOWLEDGE COACH USERS

Transcription

1 2013 FIACIAL ISTITUTIOS OVERVIEW FOR KOWLEDGE COACH USERS PURPOSE This document is published for the purpose communicating, to users the toolset, updates and enhancements included in the current version. This document is not, and should not be used as an audit program to update the audit documentation an engagement started in a previous version this product WORKPAPER UPDATES AD ROLL FORWARD OTES General Roll Forward ote: You must be the current editor all Knowledge Coach workpapers to update to the latest content, and you must be the current editor upon opening the updated workpaper for the first time to ensure you see the updated workpaper. The 2013 Knowledge-Based Audits Financial Institutions has been updated to help auditors conduct audit engagements financial institutions in accordance with the new clarified and redrafted auditing standards resulting from the ASB s Clarity Project and related guidance, including the requirements SAS 127, Omnibus Statement on Auditing s Many new tips and examples have been incorporated. The 2013 tools include links to specific guidance that provide instant access to detailed analysis related to the and processes discussed in the workpapers. Also included are updated U.S. GAAP Financial Statement Disclosures Checklist and Industry-Specific Disclosures Checklist Depository and Lending Institutions that provide a centralized resource the current required and recommended U.S. GAAP disclosures and key presentation items, using the style referencing under the FASB Accounting s Codification. The 2013 edition Knowledge-Based Audits Financial Institutions includes the following updates: Knowledge-Based Audit Documents (KBAs) EW KBA-404 Understanding Activity-Level Controls: Mortgage Banking designed to help document factors to consider regarding mortgage banking activities activity-level controls and accompanying new RES-010 Assertions and Examples What Can Go Wrong and Related Controls That Address Example Controls and What Can Go Wrong Mortgage Banking. Type KBA-103 Evaluating and Communicating Internal Control Deficiencies Modified instructions to include guidance on potential effects deficiencies noted by the auditor. Y/ Instructions Y AU-C 265 KBA-104 Summary and Evaluation Misstatements and Omitted, Inaccurate, or Incomplete Disclosures ew Conclusion on whether disclosures met auditor expectations moved from KBA-400 to the conclusion section this workpaper. KBA-201 Client/Engagement Acceptance and Continuance Form s Roll Forward and Update Content Considerations 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 1

2 ew Added new questions on assessing the entity's financial viability: m. Is the entity having difficulty meeting regulatory capital requirements? n. Has there been any significant deterioration in the entity s loan and securities portfolios? o. Is the entity under a cease and desist order, supervisory agreement, or any other regulatory restraint? ew Added new entity information to obtain the following pertinent information about stock for a stock institution: State incorporation, number common shares authorized and par value, number shares issued and outstanding, number shares in treasury, other types stock. Table other than procedures KBA-301 Worksheet for Determination Materiality, Performance Materiality, and Thresholds for Trivial Amounts Moved determination tolerable misstatement to AID Worksheet ew Added new worksheet to determine and document component materiality. Worksheet KBA-302 Understanding the Entity and Its Environment: Complex Entities Removed "o" from the Considered column. Table other than procedures Removed duplicative considerations. Table other than procedures Modified considerations to conform to AU-C 315. Table other than procedures Y AU-C 315 and AU-C 240 ew Added new consideration regarding management's belief that their level authority justifies certain level compensation and personal privileges. Table other than procedures Y AU-C 240 ew Added practice alert about the composition the audit committee for institutions with assets $500 million or more. Practice points ew Added new factor on industry conditions: b. The segment the financial services industry in which Table other than 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 2

3 the entity operates, procedures f. Sensitivity earnings to changes in interest rates, liquidity, asset quality, fiduciary, and processing risk (including how the entity is affected by federal reserve interest rate policies and other economic, political or social conditions). Table other than procedures ew Modified factors on regulatory environment: a. High degree complex regulation and changes in laws or regulations (e.g., call report instructions, capital requirements). Table other than procedures b. Accounting principles (i.e., applicable financial reporting framework) and industry-specific practices (including any special legal, regulatory, or reporting requirements (such as FDIC audit regulations, and HUD reporting requirements). c. Legislation and regulation that significantly affect the entity s operations (regulatory requirements and direct supervisory activities, including the regulatory agencies, i.e., the FDIC, OCC, FRB, CUA, and state agencies, that have oversight responsibility for the entity and the nature and compliance with any regulatory agreement the entity is operating under). Modified factor on regulatory environment: h. Communications from regulatory agencies regarding noncompliance or possible noncompliance including the results the last regulatory examination and any related correspondence. Table other than procedures ew Added new factor on regulatory environment: i. The entity s most recent CAMELS rating and when it was assigned. Table other than procedures ew Modified factor on financing: c. Use f-balance-sheet financing arrangements, specialpurpose entities, and other complex financing arrangements (such as use federal funds purchased and repurchase agreements). Table other than procedures KBA-302 Understanding the Entity and Its Environment: oncomplex Entities ew Added practice alert about the composition the audit committee for institutions with assets $500 million or more. Practice points KBA-400 Scoping and Mapping Significant Account Balances, Classes Transactions, and 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 3

4 Disclosures d column on "Did Management's Disclosures Meet the Auditor's Expectations." This question was moved to KBA-104. Modified instructions accordingly. Table other than procedures ew Added Mortgage Banking to Table I Scoping and Mapping Table other than procedures KBA-402 Understanding General Controls for Information Technology ew Added Mortgage banking (transfers and servicing) to the entity's applications important to financial reporting. KBA-412 Understanding Controls Maintained by a Service Organization ew Added step regarding the evaluation the date Type 1 reports. Modified step regarding the time period covered by Type 2 reports to conform to the standards. KBA-502 Summary Risk Assessments Modified instructions to provide clearer guidance on the auditor's approach. KBA-901 Financial Statement Disclosures Checklist This Financial Statement Disclosures Checklist is updated for disclosure and key presentation requirements in effect as September 30, Table other than procedures Table other than procedures Table other than procedures Instructions Disclosure Update Y AU-C 402 Y AU-C 402 Y Various Audit Programs (AUDs) Audit programs have been reorganized and reordered for better workflow. Additionally, duplicative have been removed throughout the audit program series. EW AUD-804 Audit Program: Mortgage Banking Activities has been developed to document the audit plan for further audit procedures to relating to financial reporting mortgage banking activities Type Y/ AUD-100 Tailoring Question Workpaper 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 4

5 Y/ ew ew tailoring questions have been added. Tailoring /A Review and answer. All these new tailoring questions will impact other workpapers. Be sure to add additional audit areas, when applicable. AUD-101 Overall Audit Program Moved much the detailed information from sub to practice points so that experienced users familiar with this program have the option to save the time spent reading the detail. Combined to eliminate duplication; new step reads as follows: 4. Evaluate, conclude on, and document whether auditor has the ability to adhere to the fundamental principles and requirements pressional and ethics standards including: a. Integrity; b. Objectivity; c. Independence, d. Pressional competence and due care; e. Compliance with firm policies; f. Confidentiality; and g. Pressional behavior. Combined to eliminate duplication; new step reads as follows: 6. Perform client acceptance or continuance procedures in accordance with firm policy. Changed step to include directive to perform opening balance procedures. ew step reads as follows: 8. Perform the preliminary engagement activities necessary to establish an appropriate audit strategy and audit plan, including the audit procedures necessary to obtain sufficient appropriate audit evidence regarding the opening balances. Moved project management step to practice point, deleting the following step: 16. Consider preparing a detailed list information that is needed to perform the audit, for the client to prepare Wolters Kluwer. All Rights Reserved. RES-KCO Page 5

6 Y/ Moved project management step to practice point, deleting the following step: 17. Consider preparing a budget for completion the audit engagement. Modified materiality step to include AU-C 600 considerations. Modified reads as follows: 19. Determine materiality for the financial statements as a whole, the materiality level or levels for particular classes transactions, account balances, or disclosures, if applicable, and performance materiality for purposes assessing the risks material misstatement and determining the nature, timing, and extent further audit procedures. This determination should include component materiality and component performance materiality when those provisions AU-C 600 apply. Y AU-C 600 d the following step: For entities with multiple locations or business units, determine tolerable misstatement at an amount that reduces to an appropriately low level the probability that the total uncorrected and undetected misstatements would result in material misstatement the financial statements. Combined. ew step reads as follows: 32. Identify and document the following: a. Potential litigation and claims; b. Commitments and contingencies; c. Concentrations risk; d. Related-party transactions; e. Significant management estimates and judgments; f. ew or significant accounting issues; and g. Other areas requiring special audit consideration. d the following step: Identify financial and nonfinancial information that may be useful for performing substantive analytical procedures. d the following step: For clients with multiple locations or business units, 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 6

7 Y/ identify significant accounts, classes transactions, and disclosures, and their relevant assertions based on the financial statements, and assess the risk material misstatement to the financial statements to determine the extent to which audit procedures should be performed at selected locations or business units to obtain sufficient appropriate audit evidence about whether the financial statements are free material misstatement. Added documentation to understanding step above and deleted this duplicate step: Document the understanding obtained internal controls relevant to the audit and each the internal control components, the sources information from which the understanding was obtained, and the risk assessment procedures performed. Added documentation to step above and deleted this duplicate step: Document the controls related to the identified risks about which the auditor has obtained an understanding. Combined on response. Modified step reads as follows: 50. Design, document, and implement the auditor s overall responses to the assessed risks material misstatement at the financial statement level. d step: 51. Design, document, and implement overall responses to address the assessed risks material misstatement at the financial statement level. d step: 52. Determine whether it is necessary to make pervasive changes to the nature, timing, and extent audit procedures to adequately address the assessed risks material misstatement; such as: Increasing substantive testing the valuation numerous significant accounts at year-end because significantly deteriorating market conditions; and Obtaining more persuasive audit evidence from 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 7

8 Y/ substantive procedures due to the identification pervasive weaknesses in the entity s control environment. Combined. ew step reads as follows: 57. Determine whether to test the operating effectiveness internal controls over financial reporting. If testing the operating effectiveness internal controls for significant audit areas, document the planned approach to testing, results testing, and conclusions. d the following duplicate step from the perform procedures section as it appears in the concluding section: Perform audit procedures to evaluate whether the overall presentation the financial statements, including the related disclosures, is in accordance with the applicable financial reporting framework. AUD-603 Audit Program: Using the Work An Auditor s Specialist ew Added practice point on referring to the auditor s specialist in the auditor s opinion. Practice Point Y AU-C 620 AUD-800's Audit Programs Combined disclosures substep in all audit programs. Modified substep to read as follows: c. Financial information is appropriately presented and described and disclosures are clearly expressed at appropriate amounts. AUD-800 Audit Program: Custom Modified practice point language for uniformity. s AUD-801 Audit Program: Cash and Due from Banks Tailoring added and modified to reflect changes noted below. Changed title from Cash to Cash and Due from Banks. ew We obtained copies individual teller summary sheets at the balance sheet date and performed the following procedures: a. We reconciled totals to the general ledger control account. b. We tested a sample teller sheets for accuracy Wolters Kluwer. All Rights Reserved. RES-KCO Page 8

9 Y/ c. We reviewed the teller sheets for noncash items included in teller funds. d. We reviewed teller fund balances for reasonableness and determined that funds are within prescribed limits. e. We reviewed over/short amounts for significant amounts or patterns. ew We obtained a listing all cash, clearing and exchange items or items comprising suspense accounts, and due from back accounts open as the balance sheet date and cash accounts opened or closed during the period under audit, showing (a) account number and type, (b) custodian, and (c) balance per the general ledger, and performed the following procedures: a. We reviewed the creditworthiness correspondents. b. We reconciled totals to the general ledger control account. c. We reviewed significant reconciling items and the aging reconciling items. d. We traced significant items to subsequent clearings in due from accounts. e. We determined that all accounts opened or closed during the period under audit were approved by appropriate personnel. d step to request cutf bank statements. ew We confirmed consigned items with consignors. ew For federal funds sold, we performed the following procedures: a. We obtained a schedule federal funds sold, tested the clerical accuracy the schedule, and reconciled it to the general ledger. b. We investigated any unusual reconciling items. c. We confirmed individual federal funds sold with the appropriate financial institutions. d from step for additional procedures to be performed 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 9

10 Y/ when planned audit procedures were insufficient: a) Performing surprise cash counts (it is included in a step above), and b) Testing teller records which was moved up to a primary step. AUD-802 Audit Program: Investments in Securities, Derivative Instruments, and Hedging Activities Tailoring added and modified to reflect changes noted below. ew 4. We reviewed the entity s reconciliations statements or data feeds from custodians to the accounting records and determined that: ew a. Reconciling items were resolved properly. b. Journal entries related to the reconciliations were appropriate and made by authorized persons. ew 5. We reviewed any master netting arrangements and determined that all related financial instruments were recorded. ew ew Substep added to valuation procedures: b. We determined that the method used to determine the fair value the securities and derivatives was consistently applied across periods and evaluated any change in such method for propriety and management bias. ew ew Added sub to impairment procedures: c. When the entity has recognized an impairment loss, we gathered evidence supporting the amount the impairment adjustment recorded and: (1) Determined that the write-down the investment to a new cost basis was accounted for as a realized loss; ew (2) Tested the calculation the loss recorded; (3) Determined that the new cost basis investments previously written down is not changed for subsequent recoveries in fair value; (4) Reviewed a summary investments written down for completeness and unusual items; (5) When applicable, evaluated management s assessment the credit rating the counterparty; and (6) Determined whether the entity has appropriately complied with the requirements the applicable financial 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 10

11 Y/ reporting framework. AUD-803 Audit Program: Accounts Receivable and Revenue Tailoring added and modified to reflect changes noted below. ew Added new audit objective: The allowance for loan and lease losses is appropriate for estimated losses. Audit Objectives Modified audit objective to read: Loans receivable, interest income, fees, costs, accrued interest receivable, unearned discount, unamortized purchase premiums and discounts, unamortized net deferred loan fees or costs, and the allowance for loan and lease losses are properly measured and recorded. Disclosures are clearly expressed and at appropriate amounts. Audit Objectives ew We analyzed and evaluated the changes in the mix between different types loans in the loan portfolio. ew We compared average loan balances by type in the current period with average loan balances by type in the prior period. ew We compared the average yield throughout the period computed for each loan category on a monthly or quarterly basis. /ew Created new separate step for selecting loans for detailed review and added sub as follows: We selected individual loans for detailed review. Criteria for selection included: loans exceeding a specified amount; sample from list new loans made during the period; problem loans exceeding a specified amount; and other loans selected at random, and performed the following procedures: a. We inspected loan documents for evidence about the existence and ownership the loan. b. We looked for evidence approvals by the board directors or the loan committee as required by the institution s written lending policies. c. We determined that a comparison had been made loan amounts to appraisals. d. We determined that hazard and title coverage met coverage requirements set in the institution s written lending policies Wolters Kluwer. All Rights Reserved. RES-KCO Page 11

12 Y/ e. For guaranteed loans, we read the financial statements and other evidence the financial condition cosignatories and guarantors. f. We determined that the loan is categorized in accordance with the institution s loan review system. g. If the institution records loans at the gross amount with an fsetting loans in process account (LIP), we traced loans to the LIP account. h. For construction loans selected, we: (1) Traced loan amounts to the LIP account. (2) Reviewed disbursements in connection with the percentage completion noted on inspection reports. (3) Reviewed the LIP ledgers for areas concern related to the capitalization loan fees and interest added to the loan balance during construction. i. For classified loans, reviewed updating correspondence, working papers prepared by the institution s internal loan review personnel, and any regulatory examiner reports (including those with information on shared national credits) j. If deemed appropriate, we discussed the status and background the loan with the responsible loan ficer and the loan review ficer. k. Considered reviewing the institution s analysis the borrower s financial resources, liquidity and future cash flows, and other financial forecasts, particularly for unsecured loans for which repayment is dependent on the borrower's ability to generate funds from pritable operations. ew Added practice points related to reviewing borrower s financial resources. Practice Points Moved related to loans held for sale and mortgage banking activities to new AUD-804 Mortgage Banking Activities. ew If the institution is involved in credit card lending operations, we performed the following procedures: a. We confirmed customer balances and performed above for processing the confirmation requests and replies and summarizing the results confirmation procedures and those for loans receivable confirmed on a date other than 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 12

13 Y/ the balance sheet date. b. We tested interest and service charges, collections, delinquencies, and chargefs. ew If the institution processes merchants deposits where the resulting receivables are owned by other institutions, we performed the following procedures: a. We reviewed the agreement between the institutions. b. We tested service fee income. ew Added the following to procedures for material construction loans: a. We determined that construction loans are properly classified as loans rather than real estate investments; b. We determined that origination, approval, inspection, and disbursements were made based on progress the particular construction project. c. If considered appropriate, we performed on-site inspections significant construction projects to review the collateral and to determine whether construction has progressed in accordance with the loan terms. ew If the institution is involved in lease financing, we: a. Confirmed the lease terms including cancellation provisions with the lessee. b. For leveraged leases, we also confirmed the information necessary for income tax purposes with the lease trustee, and evaluated whether income for book purposes is being recorded in conformity with the applicable financial reporting framework. Moved related to loan transfers to new AUD-804 Mortgage Banking Activities. Added the following for testing the adequacy the allowance for loan and lease losses (ALLL): a. We considered whether specialized skills or knowledge with regard to one or more aspects the allowance for loan and lease losses is required in order to obtain sufficient appropriate audit evidence. b. We determined whether: (1) Management has appropriately applied the requirements the applicable financial reporting framework relevant to 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 13

14 Y/ the estimate the ALLL; (2) The methods for estimating the ALLL are appropriate and have been applied consistently; and (3) Changes from the prior period, if any, in the estimate the ALL or the method for estimating it are appropriate in the circumstances. c. We tested management s methodology used to estimate the ALLL and the data on which it is based and evaluated whether: (1) The method measurement used is appropriate in the circumstances. (2) The assumptions used by management are reasonable in light the measurement objectives the applicable financial reporting framework. (3) The data on which the ALLL is based are sufficiently reliable for our purposes. d. We determined whether events occurring up to the date the auditor s report provide audit evidence regarding the ALLL and performed the following procedures: (1) We reviewed subsequent cash collections loan balances. (2) We reviewed loans written f during the period. (3) We determined whether write-fs had been properly authorized and examined related supporting documentation. e. If considered necessary, we developed an independent expectation the ALLL to corroborate its reasonableness. We considered developing a point estimate or range to evaluate management s point estimate. f. We tested management s identification loans that contain high credit risk or other significant exposures and concentrations. g. We estimated portions the ALLL that are needed for the following: (1) Classified loans other than those with specific allowances; (2) Loans evaluated on a pool basis; and (3) Other loan losses inherent in the portfolio. h. We determined that credit losses and other items charged or credited to the ALLL, such as loan charge-fs and 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 14

15 Y/ recoveries, have been included in the financial statements at appropriate amounts and determined that disclosures are adequate. i. We reviewed evidence that the institution has procedures for identifying and reporting potential problem loans (e.g., a watch list) and followed up on such loans, as well as delinquent loan reports and procedures for follow up on delinquencies. j. We examined evidence that credit ficers perform a periodic review potential problem loans and assigned risk ratings that are promptly reflected in a classified loan or other appropriate report. k. We examined evidence that senior management and appropriate board committee review and monitor past due, watch list, classified loans, and assigned risk ratings. l. We evaluated the design and implementation controls over the preparation the periodic past due, watch list, and classified loan reports and evaluated the basis for which each report was prepared, including which loans are included and excluded. m. For loans that are pooled for purposes determining the ALLL, we: (1) Reviewed and tested compliance with the institution s chargef and nonaccrual policy. (2) Tested the completeness and accuracy historical data reports, such as delinquency reports, that are relied upon in estimating the ALLL n. We examined evidence that the delinquent loan report interfaces appropriately with the watch list or problem loan report and tested the reports accuracy by tracing a sample loans between the trial balance and the applicable report. o. We examined evidence that the institution has an independent loan review function to review and evaluate credit ficers analysis significant loans. p. We reviewed the institution s documentation that analyzes the need for and documents each component the ALLL. For example, we tested the calculation historical loss experience for one or more periods and one or more pools loans, or tested the calculation discounted 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 15

16 expected cash flow for one or more impaired loans. q. If the ALLL amount is outside a reasonable range, we treated the difference between the institution's estimate and the closest reasonable estimate as a likely error and aggregated it with other likely errors. r. exposure particular borrowers, including that related to standby letters credit, guarantees, commitments to lend, and other f-balance-sheet exposures in addition to the institution s liability for other credit exposures in our evaluation the propriety the ALLL. s. We reviewed recent regulatory examination reports. Y/ ew ew Practice Point under c.(2) above: Practice Point: When evaluating management s assumptions, the auditor may wish to consider factors such as: Current local, national, and international economic conditions and trends, particularly as they have affected collateral values; The amount recoveries loans previously charged f; The composition the loan portfolio and trends in volume and terms loans, as well as trends in delinquent and nonaccrual loans that could indicate historical loss averages do not reflect current conditions; Identified potential problem loans and large groups problem loans, including delinquent and nonaccrual loans and loans classified according to regulatory guidelines; Concentrations loans to individuals or entities and their related interests, to industries, and in geographic regions; Size specific credit exposures (a few large loans versus numerous small loans); Quality the internal loan review and internal audit functions; The effects changes in lending policies and procedures, including those for underwriting, credit monitoring, collection, and chargefs that could indicate historical loss averages do not reflect current conditions; Results regulatory examinations; The nature and extent related-party lending; The amount late or partial payments in a particular period and the amount chargefs; The risk classification and allowance allocation given to problem loans; Estimates collateral values, and the related 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 16

17 ew assumptions that drive the determination such values, such as cash flow; Estimates, discount rates, and projected occupancy rates; Current economic or market conditions that in the future may affect a borrower's ability to meet scheduled repayments; and Contingencies, such as a commitment for funding from a third party. 31. If improper revenue recognition was not identified as a risk a material misstatement due to fraud, we documented the reasons regarding how that presumption was overcome. AUD-804 Audit Program: Audit Program: Mortgage Banking Activities ew ew AUD-804 Mortgage Banking Activities Moved the on transfers loans receivable from AUD-803 and added new for loan sales and loan servicing. Y/ Y AU-C 240 AUD-805 Audit Program: Prepaid Expenses, Deferred Charges, and Other Assets, Including Real Estate Investments, Real Estate Owned, and Foreclosed Assets ew ew Changed title to Audit Program: Prepaid Expenses, Deferred Charges, and Other Assets, Including Real Estate Investments, Real Estate Owned, and Foreclosed Assets Added new audit objectives for real estate investments, real estate owned, and foreclosed assets: D. Real estate investments, real estate owned, and foreclosed assets exist and are owned by the institution. E. Sales real estate assets and recognition gains and losses have been properly recorded. Added section headers and created a new section for Real Estate Investments, Real Estate Owned, and Foreclosed Assets If the institution is a member the FHLB or Federal Reserve System, we performed the following procedures: a. Confirming stock ownership with the related FHLB or FRB. b. Reconciling the dollar amount the shares with the Audit Objectives Tailoring added and modified to reflect changes noted below Wolters Kluwer. All Rights Reserved. RES-KCO Page 17

18 Y/ general ledger. c. If the institution is holding FHLB stock, we considered the status the FHLB s redemption its stock at par value before concluding that income recognition is appropriate for any FHLB stock dividends. ew We confirmed material deposit balances and other similar assets held by third parties. For material real estate investments, real estate owned, and foreclosed assets, we performed the following procedures: a. We obtained schedules real estate investments, real estate owned, and foreclosed assets showing the beginning balances, additions, sales, write-downs, and ending balances and performed the following procedures: (1) Reconciled the balances to the general ledger. (2) Tested additions, deletions, and impairments, if any. (3) We obtained audit evidence about the carrying amount the foreclosed assets and real estate investments. Practice Point: This may involve a review appraisals, feasibility studies, forecasts, sales contracts or lease commitments, and information concerning the developer and his or her track record. (4) We compared current-period ending balances per the general ledger to the prior-period balances and investigated any unusual or unexpected variations, taking into consideration economic conditions and known changes in the client s foreclosed asset and real estate investments. c. We determined that adequate provisions have been made for impairment real estate assets, if any. ew e. We tested REO assets sold and determined that such sales, including the recognition gains and losses, have been properly recognized and recorded. f. We tested the propriety capitalized interest and other holding costs. AUD-806 Audit Program: Intangible Assets Modified substep on impairment analysis. Modified read as follows: (2) We reviewed management s analysis the 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 18

19 Y/ recoverability the carrying values for reasonableness. ew Added the following substep for intangible assets not subject to amortization: a. If the entity opts to first assess qualitative factors to determine whether the existence events or circumstances leads to a determination that it is more likely than not that the fair value the asset is less than its carrying amount, we have reviewed and evaluated management s assessment and conclusion. Y ASU AUD-807 Audit Program: Property and Equipment, and Depreciation Moved considerations for PPE summary into main step, eliminating 12 sign fs d duplicate step: d. We scanned the detailed asset listing to determine whether the useful lives are reasonable and depreciation methods are in accordance with the applicable financial reporting framework. d duplicate step: b. We reviewed the useful lives the long-lived fixed assets to determine their reasonableness in the current operating environment. d duplicate step: (8) Evidence is available obsolescence or physical damage an asset. AUD-807 Audit Program: Deposit Accounts, Interest Expense, and Accrued Interest Payable Tailoring added and modified to reflect changes noted below. ew We performed the following substantive analytical procedures for deposit-related financial statement amounts and investigated any significant fluctuations or deviations from the expected balances: a. We compared the percentage deposit growth during the period with historical percentages. b. We compared the average deposit account balances during the period with prior periods. c. We reviewed the relative composition deposits from period to period. d. We compared the amounts and percentage ratio 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 19

20 ew ew dormant accounts to total deposits with those prior periods. e. We compared deposit interest rates with those prevailing in the institution's marketing area for the same periods. g. We performed alternative procedures on nonreplies to positive confirmation requests, negative requests for which the customers indicated that they are unable to confirm, and no-mail accounts, including reviewing the respective period deposit account statements and subsequent statements for unusual activity and investigating any significant or unusual activity noted. For no-mail accounts, we reviewed the written request from the depositor requesting the no-mail status. We verified that overdraft balances are properly classified along with the related write-fs uncollectible balances. AUD-810 Audit Program: Payrolls and Other Liabilities ew Added new step on analytical procedures, referencing AID Reorganized the order the audit procedures. d a duplicative step on search for unrecorded liabilities, as this step is performed in AUD-809. AUD-811 Audit Program: Income Taxes ew ew ew For separate financial statements affiliates, we reviewed terms all tax-sharing agreements between affiliated entities, to determine proper disclosure and accounting treatment. We reviewed the tax status and consolidated return requirements subsidiaries and the validity current tax year election changes. We reviewed the status current-year acquisitions other companies and their preacquisition tax liabilities and exposures. s s s Y/ ew Added new step on whether the entity maintained Y AU-C 500 Tailoring added and modified to reflect changes noted below. Tailoring added and modified to reflect changes noted below Wolters Kluwer. All Rights Reserved. RES-KCO Page 20

21 Y/ appropriate documentation for the calculation and contents tax accruals. AUD-812 Audit Program: Debt Obligations Tailoring added and modified to reflect changes noted below. Added deferred issuance costs and premiums and discounts to the step to compare current year's account balances with the prior year's account balances. ew We compared the current year s interest expense by major category debt as a percentage the average amount the respective debt outstanding during the year with stated rates on the debt instruments. s ing the title an analytical step to match AID Added the following sub to this step: We obtained copies new debt agreements and reviewed: (1) Terms and conditions; (2) Underlying collateral, if any; (3) Subordination the debt; (4) Evidence regulatory approval; (5) Presence restrictive covenants; (6) Unusual features; and (7) Embedded derivatives. Modified audit step regarding restrictive covenants to include the consideration "cross default" provisions. ew For financing transactions resulting from failed sales under FASB ASC 860, we reviewed agreement terms to validate that financing treatment is still appropriate. ew For treasury tax and loan accounts, we obtained from the client, reconciliations the TT&L demand and note accounts and performed the following procedures: a. We tested the arithmetical accuracy the reconciliations, traced balances to the general ledger, and tested significant reconciling items. b. We determined that TT&L amounts are properly classified and recorded in the demand and note accounts. c. We confirmed the statement balances with the Federal Reserve Bank (see the sample confirmation request at COR-803 Request for Confirmation Accounts with the 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 21

22 Y/ Federal Reserve Bank). ew 10. For CMOs and REMICs, we obtained and reviewed compliance and verification letters prepared by the trustee s auditors, and verified the principal balance the collateral and bonds, the cash flows associated with the issue, and compliance with the respective terms the underlying agreements. Reorganized the order the audit procedures. AUD-813 Audit Program: Equity and Regulatory Capital Tailoring added and modified to reflect changes noted below. Changed title to Equity and Regulatory Capital Added new audit objectives for regulatory capital: C. Regulatory matters are properly and understandably described and disclosures are adequate and made in accordance with the applicable financial reporting framework. Audit Objectives D. Capital amounts are determined in accordance with the applicable financial reporting framework, regulatory reporting requirements, and regulatory capital standards. ew We determined that calculations actual and required regulatory capital ratios, including regulatory capital amounts (ratio numerators) and related asset bases (ratio denominators) are accurate. ew We determined that management has properly handled significant nonrecurring transactions as to the impact on regulatory capital. ew Added sub to step to determine RAP-GAAP differences: a. We inquired about and discussed with ficers having responsibility for regulatory financial reporting, the existence and nature any differences between the applicable financial reporting framework as applied in the financial statements that differs from reporting in regulatory reports b. We reviewed copies prior year regulatory reports and, as necessary, the client s supporting workpapers Wolters Kluwer. All Rights Reserved. RES-KCO Page 22

23 Y/ c. We obtained management s analysis classification issues concerning preparation call reports, including risk weighting classification assigned. d. We considered the potential for the applicable financial reporting framework to have been applied differently for any other the institution s regulatory reports. ew We obtained and tested any reconciliation amounts supporting regulatory capital ratio calculations to amounts in the financial statements prepared in accordance with the applicable financial reporting framework and performed the following procedures: a. We tested the schedules for completeness arithmetical accuracy. b. We agreed amounts reported in accordance with the applicable financial reporting framework to the general or subsidiary ledgers or both. c. We obtained supporting evidence for regulatory amounts. ew We reviewed the nature and amount any material amounts reported in accordance with a regulatory requirement for propriety and consistency with prior years. ew We evaluated current treatment items that resulted in past corrections or changes to regulatory financial reports. ew We evaluated the impact any significant nonrecurring transactions on regulatory capital. ew We considered whether significant changes in instructions for preparation call reports have been applied to material transactions. ew We inquired about, and discussed with ficers having responsibility for call reporting, any significant reclassifications transactions since the last filed regulatory report. ew We considered the implications capital noncompliance on the financial statements and the auditor s report. ew Audit s for Regulatory Capital Mortgage Companies and Activities 23. We obtained and read new seller-servicer agreements entered into during the period, or amendments to existing 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 23

24 Y/ agreements, for capital requirements in effect. 24. We obtained and tested management s schedules supporting calculation the entity s actual and required capital amounts. 25. We evaluated whether management has properly accounted for significant nonrecurring transactions as to their impact on regulatory capital. 26. We obtained and tested any reconciliation amounts supporting regulatory capital ratio calculations to amounts in the financial statements prepared in accordance with the applicable financial reporting framework and performed the following procedures: a. We tested the schedules for completeness arithmetical accuracy. b. We agreed U.S. GAAP amounts to the general or subsidiary ledgers or both. 27. We considered the implications capital noncompliance on the financial statements and the auditor s report. AUD-815 Audit Program: Journal Entries and Financial Statement Review Tailoring added and modified to reflect changes noted below. Moved consideration for selecting journal entries to test into main step eliminating 5 sign fs. ew Whether items selected for testing should include journal entries made throughout the audit period. Moved consideration for selecting journal entries at components to test into main step eliminating 5 sign fs. Modified step for JE to test at period end. Modified step reads as follows: Items selected for testing included journal entries and other adjustments made in the course preparing the financial statements and those made at the end a reporting period. d the following step as it duplicates step in another program: We inquired individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing journal entries and other adjustments, including: 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 24

25 Y/ a. Accounting and data entry personnel about whether they were requested to make unusual entries during the audit period. b. Certain programmers and IT staff about the existence any unusual and/or unsupported entries and whether they were initiated directly by top management outside the normal accounting process. d the following step as it duplicates step in another program: We examined material journal entries and other adjustments made in the course preparing the financial statements and performed the following procedures: a. We agreed any material journal entries or other adjustments to the underlying support for such entries. Combined on financial statement review to read as follows: 9. We performed an overall review the financial statements, including performing analytical procedures to evaluate our conclusions regarding significant accounts and disclosures and to assist in forming an opinion on whether the financial statements as a whole are free material misstatement. ew a. The financial information and related disclosures are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. AUD-816 Audit Program: Related-Party Transactions, Commitments and Contingencies, Estimates, and Concentrations Tailoring added and modified to reflect changes noted below. Reorganized the order the audit procedures. Step 1 modified to better reflect the required reassessment procedures required by AU-C 550, to include new and modified sub. Y AU-C 550 Removed duplicative step on VIEs. Step 2 modified to better reflect the required reassessment procedures required by AU-C 550, to include new and Y AU-C Wolters Kluwer. All Rights Reserved. RES-KCO Page 25

26 modified sub. Step 4 modified to better reflect the required reassessment procedures required by AU-C 550, to include new and modified sub. Sub fraud risk removed and replaced by modifications at step 2. Y/ Y AU-C 550 Y AU-C 550 Removed duplicative step on transactions not previously identified and on fraud risk. ew Added new step on forming an opinion and the related evaluations. Y AU-C 550 ew Added new step on obtaining an understanding how the entity is complying with the legal and regulatory framework. Y AU-C 250 ew Added new step on obtaining sufficient appropriate audit evidence regarding material amounts and disclosures in the financial statements that are determined by the provisions laws and regulations generally recognized to have a direct effect on the financial statements. Y AU-C 250 Added the following new inquiries management: c. Sales commitments (including loans and investments). d. Purchase commitments (including loans and investments). f. Contingent risks associated with custodial, servicing, brokerage, and fiduciary functions. g. Financial arrangements or transactions with other financial institutions. i. Significant unfunded loan commitments. j. Significant pooling and servicing agreement warranties and representations. k. Asset-backed securities warranties and representations. l. Material recourse obligations. m. Material contingencies associated with retail sales contracts that have been sold to the institution. n. Contingencies related to: obligations under standby letters credit o. Agreements to repurchase receivables (or to repurchase 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 26

27 ew ew the related property) that have been sold. p. For institutions acting as servicers loans, contingencies related to noncompliance with investor-servicing requirements. q. Any related contingencies for a bank or saving institution that lends customers securities. r. Contingencies related to trust activities. s. Commitments or contingencies related to innovative transactions involving securities and loans (such as transfers with recourse or put options). If there is no indication actual or potential litigation, claims, or assessments that may give rise to the risk material misstatement and management has not consulted legal counsel, we determined that obtaining a representation letter from the entity s legal counsel is not necessary and we documented the basis for our determination. In such circumstances that the entity s legal counsel restricted the use his or her opinion to the client or to third parties, we evaluated whether the effect this restriction impacted our ability to obtain sufficient appropriate audit evidence and evaluated the effect this circumstance on the audit opinion. s s Y/ Y AU-C 501 Y AU-C 9620 ew If the entity s legal counsel identifies new litigation or claims, subsequent to the date the request for the letter enquiry, we inquired management as to the matter, prior to signing the auditor s report. s ew If we became aware information that indicates the existence material liabilities resulting from litigation and claims, we obtained audit evidence relevant to the following: s Y AU-C 501 a. The period in which the underlying cause for legal action occurred. b. The degree probability an unfavorable outcome. c. The amount or range potential loss. ew If the client had not consulted legal counsel during the period under audit, we included the following item in the s 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 27

28 Y/ representation letter from management: We are not aware any pending or threatened litigation, claims, or assessments, or unasserted claims or assessments, including contingent liabilities, that are required to be accrued or disclosed in the financial statements in accordance with [ insert applicable financial reporting framework], and we have not consulted a lawyer concerning litigation, claims, assessments, or contingent liabilities. ew If our audit procedures led to the discovery matters a legal nature not previously identified by management, we considered the impact each the matters on the financial statements. s Changed section heading to clarify that the estimates section does not apply to the allowance for loan losses which was added to AUD-803 ew ew concentrations to be identified: a. Concentrations in commercial real estate lending. b. High concentrations real estate or other assets in a particular geographic area. c. Concentrations loans to individuals and their related interests, industries, and geographic regions. j. Concentrations credit risk arising from all financial instruments, whether from an individual counterparty or groups counterparties. AUD-817 Audit Program: Fair Value Measurements and Disclosures s ew Added review financial statement disclosures s Removed duplicative. s ew Added step on the evaluation third-party pricing services. AUD-818 Audit Program: Variable Interest Entities Y AU-C 540 Tailoring added and modified to reflect changes noted below. ew Added practice point containing requirements for VIE to be consolidated. s 2013 Wolters Kluwer. All Rights Reserved. RES-KCO Page 28