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Audit and Accounting Guide Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies

ISBN: 978-1-943546-75-6
864 pages
September 2016
Audit and Accounting Guide Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies (1943546754) cover image

Description

The financial services industry is undergoing significant change, which has added challenges for institutions assessing their operations and internal controls for regulatory considerations.

This 2016 edition of this industry standard resource offers clear and practical guidance of audit and accounting issues such as transfers and servicing, troubled debt restructurings, financing receivables and the allowance for loan losses, and fair value accounting. It also provides direction for institutions assessing their operations and internal controls for regulatory considerations.

New and existing regulatory reporting matters are also covered, including updates resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act and BASEL III implementation.

Key Benefits Include:

• Coverage of regulatory updates from key industry regulators (FDIC, OCC, Federal Reserve and NCUA)
• Coverage of Basel III capital rulings that implement both the Basel III capital framework issued by the Basel Committee on Banking Supervision and certain requirements imposed by the Dodd-Frank Act
• Illustrative auditors’ reports
• Appendix which highlights FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
• Appendix which highlights an overview of statements on quality control
• A new appendix which highlights FASB ASU No. 2016-02, Leases
• A new appendix which highlights FASB’s project on accounting for financial instruments, including an overview of FASB ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and FASB ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

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Table of Contents

Industry Overview—Banks and Savings Institutions .01-.118

Description of Business .01-.07

Regulation and Oversight .08-.69

Regulatory Background .15-.23

Deposit Insurance Fund .24-.30

The Dodd-Frank Act .31-.69

Regulatory Capital Matters .70-.91

Capital Adequacy .72-.80

Prompt Corrective Action .81-.91

Annual Independent Audits and Reporting Requirements .92-.117

Additional Regulatory Requirements Concerning the Sarbanes-Oxley Act, Corporate Governance, and Services Outsourced to External Auditors .105-.117

Other Reporting Considerations .118

2 Industry Overview—Credit Unions .01-.62

Description of Business .01-.10

The Board of Directors .07

The Supervisory Committee .08-.09

The Credit Committee .10

Charters, Bylaws, and Minutes .11-.17

Financial Structure .12-.13

Credit Union System .14-.16

Corporate Credit Unions .17

Regulation and Oversight .18-.23

Government Supervision .18-.20

NCUA .21-.23

Regulatory Capital Matters .24-.54

Natural Person Credit Unions .24-.44

Corporate Credit Unions .45-.54

Annual Audits .55-.62

Other Reporting Considerations .62

3 Industry Overview—Finance Companies .01-.14

Description of Business .01-.11

Debt Financing .08-.11

Regulation and Oversight .12-.14

Chapter Paragraph

4 Industry Overview—Mortgage Companies .01-.37

Description of Business .01-.20

Regulation and Oversight .21-.32

Reporting Considerations .33-.37

HUD Programs .33-.35

Asset Servicing for Investors .36-.37

5 Audit Considerations and Certain Financial Reporting Matters .01-.257

Overview .01-.09

An Audit of Financial Statements .04-.05

Audit Risk .06-.09

Terms of Engagement .10-.13

Audit Planning .14-.15

Materiality .16-.20

Performance Materiality .19-.20

Use of Assertions in Assessment of Risks of Material Misstatement .21-.22

Risk Assessment Procedures .23-.75

Risk Assessment Procedures and Related Activities .25-.32

Understanding the Entity and Its Environment, Including the Entity’s Internal Control .33-.75

Risk Assessment and the Design of Further Audit Procedures .76-.98

Identifying and Assessing the Risks of Material Misstatement .77-.81

Designing and Performing Further Audit Procedures .82-.98

Evaluation of Misstatements Identified During the Audit .99-.101

Audit Documentation .102-.109

Timely Preparation of Audit Documentation .105

Documentation of the Audit Procedures Performed and Audit Evidence Obtained .106-.108

Assembly and Retention of the Final Audit File .109

Using the Work of an Auditor’s Specialist .110-.115

Using the Work of a Management’s Specialist .116-.119

Processing of Transactions by Service Organizations .120-.122

Consideration of Fraud in a Financial Statement Audit .123-.151

Professional Skepticism .126-.128

Discussion Among the Engagement Team .129-.132

Risk Assessment Procedures and Related Activities .133-.136

Identification and Assessment of the Risks of Material Misstatement Due to Fraud .137-.139

Responses to the Assessed Risks of Material Misstatement Due to Fraud .140-.143

Evaluation of Audit Evidence .144-.147

Auditor Unable to Continue the Engagement .148

Chapter Paragraph

5 Audit Considerations and Certain Financial Reporting Matters—continued Communications to Management and With Those Charged With Governance .149

Communications to Regulatory and Enforcement Authorities .150

Documentation .151

Compliance With Laws and Regulations .152-.162

Responsibility for Compliance With Laws and Regulations .153-.156

The Auditor’s Consideration of Compliance With Laws and Regulations .157-.162

Going-Concern Considerations .163-.179

Evaluating Whether Substantial Doubt Exists .165-.174

Written Representations .175

Consideration of the Effects on the Auditor’s Report .176-.178

Documentation .179

Written Representations .180-.189

Written Representations as Audit Evidence .181

Management From Whom Written Representations Are Requested .182-.183

Written Representations About Management’s Responsibilities and Other Written Representations .184-.186

Date of, and Period(s) Covered by, Written Representations .187

Form of Written Representations .188

Doubt About the Reliability of Written Representations and Requested Written Representations Not Provided .189

Information Other Than Financial Statements .190-.192

Certain Financial Reporting Matters .193-.211

Disclosures of Certain Significant Risks and Uncertainties .193-.209

Segment Reporting .210-.211

Regulation and Supervision of Depository Institutions .212-.257

Introduction .212-.220

Rule Making .221-.222

Examinations .223-.228

Enforcement .229-.236

Planning .237

Detection of Errors and Fraud .238-.239

Evaluation of Contingent Liabilities and Related Disclosures .240

Going-Concern Considerations .241-.242

Regulatory Reporting Matters—Interpretation and Reporting Related to GAAP .243-.247

Auditor and Examiner Relationship .248-.257

Chapter Paragraph

6 Cash and Cash Equivalents .01-.42

Introduction .01-.08

CIPC and Cash Equivalents .02

Deposits With Other Depository Institutions .03-.05

Balances With Federal Reserve Banks and FHLBs .06

Federal Funds Sold .07

Cash on Hand .08

Accounting and Financial Reporting .09-.33

Definition of Cash and Cash Equivalents .09-.11

Classification of Cash Flows .12-.22

Acquisition and Sales of Certain Securities and Loans .23-.24

Gross and Net Cash Flows .25-.28

Cash Receipts and Payments Related to Hedging Activities .29

Financial Statement Presentation and Disclosure .30-.33

Auditing .34-.42

Objectives .34

Planning .35

Internal Control Over Financial Reporting and Possible Tests of Controls .36-.40

Substantive Tests .41-.42

7 Investments in Debt and Equity Securities .01-.163

Introduction .01-.65

U.SGovernment and Agency Obligations .05-.07

Municipal Obligations .08-.11

Asset-Backed Securities .12-.49

Other Structured Credit Products .50-.59

Issues of International Organizations and Foreign Governments .60

Other Securities .61

Transfers of Securities .62-.65

Regulatory Matters .66-.82

Bank Accounting Advisory Series .82

Accounting and Financial Reporting .83-.137

Introduction .83-.91

OTTI .92-.103

Unrealized Gains and Losses .104-.106

Premiums and Discounts .107-.113

Interest Income .114

Consolidation .115

Special Areas .116-.118

Transfers and Servicing of Securities .119-.121

Troubled Debt Restructurings .122-.124

Chapter Paragraph

7 Investments in Debt and Equity Securities—continued Loans and Debt Securities Acquired With Deteriorated

Credit Quality .125

Financial Statement Presentation and Disclosure .126-.137

Auditing .138-.163

Objectives .138

Planning .139-.143

Internal Control Over Financial Reporting and Possible Tests of Control .144-.154

Substantive Tests .155-.163

8 Loans .01-.230

Introduction .01-.56

The Lending Process .02

Credit Strategy .03-.04

Credit Risk .05-.07

Lending Policies and Procedures .08-.16

Types of Lending .17-.18

Commercial, Industrial, and Agricultural Loans .19-.30

Consumer Loans .31-.39

Residential Real Estate Loans .40-.43

Lease Financing .44-.48

Trade Financing .49-.50

CRE and Construction Loans .51-.53

Foreign Loans .54

Loans Involving More Than One Lender .55-.56

Regulatory Matters .57-.89

Real Estate Lending Standards .57-.67

Retail Credit Loans and Residential Mortgage Loans .68-.70

Troubled Debt Restructurings .71-.75

Credit Card Lending .76-.77

Nontraditional Mortgage Products .78

Correspondent Concentration Risks .79

Leveraged Lending .80

Income Recognition on Problem Loans .81-.82

Credit Union Lending Restrictions .83

Lending Statutes .84

Uniform Commercial Code .85-.87

Bank Accounting Advisory Series .88

Accounting and Financial Reporting .89-.181

Interest Income, Delinquency Fees, Prepayment Fees, and Rebates .95-.100

Loan Fees, Costs, Discounts, and Premiums .101-.122

TDRs .123-.138

Chapter Paragraph

8 Loans—continued

Real Estate Investments .139

Lease Financing .140

Foreign Loans .141-.144

Commitments .145-.152

Financial Statement Presentation and Disclosure .153-.181

Auditing .182-.230

Objectives .182

Planning .183-.184

Internal Control Over Financial Reporting and Possible Tests of Controls .185-.198

Substantive Tests .199-.230

9 Credit Losses .01-.112

Introduction .01-.22

Management’s Methodology .04-.12

Loan Reviews .13-.15

Loans Individually Evaluated for Impairment .16

Loans Collectively Evaluated for Impairment .17-.18

Estimating Overall Credit Losses .19-.22

Regulatory Matters .23-.38

Credit Unions .34-.38

Accounting and Financial Reporting .39-.62

Sources of Applicable Guidance .39-.41

Allowance for Loan Losses .42-.48

Loss Contingencies .49-.52

Financial Statement Presentation and Disclosure of Loan Impairment and Allowance for Credit Losses .53-.62

Auditing .63-.112

Objectives .63

Planning and Risk Assessment .64-.68

Internal Control Over Financial Reporting and Possible Tests of Controls .69-.75

Substantive Tests .76-.112

10 Transfers and Servicing and Variable Interest Entities .01-.127

Introduction .01-.08

Asset-Backed Securitizations .06

Loan Participations and Loan Syndications .07

Loan Servicing .08

Regulatory Matters .09-.19

VA No-Bids and Private Mortgage Agencies .16-.19

Chapter Paragraph

10 Transfers and Servicing and Variable Interest Entities—continued Accounting and Financial Reporting .20-.113

Mortgage Loans and MBSs Held for Sale .20-.29

Transfers and Servicing of Financial Assets .30-.42

Sale of Financial Assets .43-.48

Transfers of Loans With Recourse .49-.50

Servicing Assets and Liabilities .51-.69

Secured Borrowings and Collateral .70-.73

Loans Not Previously HFS .74-.78

Financial Statement Presentation .79-.85

Financial Statement Disclosure .86-.96

VIEs .97-.113

Auditing .114-.127

Objectives .114

Planning .115-.118

Internal Control Over Financial Reporting and Possible Tests of Controls .119-.125

Substantive Tests .126-.127

11 Real Estate Investments, Real Estate Owned, and Other Foreclosed Assets .01-.73

Introduction .01-.04

Foreclosed Assets .02

Real Estate Investments .03-.04

Regulatory Matters .05-.16

Accounting and Financial Reporting .17-.55

Foreclosed Assets .17-.23

Accounting and Reporting for Long-Lived Assets to Be Disposed of by Sale .24-.33

Accounting and Reporting for Long-Lived Assets to Be Held and Used .34-.40

Real Estate Investments .41-.43

Sale of Real Estate Assets .44-.45

Development Costs .46-.49

Allocation of Income and Equity Among Parties to a Joint Venture .50-.55

Auditing .56-.73

Objectives .56

Planning .57

Internal Control Over Financial Reporting and Possible Tests of Controls .58-.61

Substantive Tests .62-.73

Chapter Paragraph

12 Other Assets, Other Liabilities, and Other Investments .01-.91

Introduction .01-.10

Premises and Equipment, Net .03

FHLB or FRB Stock .04-.05

Identifiable Intangibles .06-.07

Goodwill .08

Customers’ Liabilities on Acceptances .09

Other Miscellaneous Items .10

Regulatory Matters .11-.15

Accounting and Financial Reporting .16-.76

Premises and Equipment, Net .16-.26

FHLB or FRB Stock .27-.34

Goodwill and Other Intangible Assets .35-.50

Exit or Disposal Activities .51-.52

Asset Retirement Obligations .53-.56

Customers’ Liabilities on Acceptances .57

Mortgage Servicing Advances .58

Impairment of Long-Lived Assets .59

NCUSIF Deposit .60-.66

Other Investments .67-.72

Contributed Assets .73-.76

Auditing .77-.91

Objectives .77-.78

Planning .79

Internal Control Over Financial Reporting and Possible

Tests of Controls .80-.82

Substantive Tests .83-.91

13 Deposits .01-.70

Introduction .01-.32

Demand Deposits .04

Savings Deposits .05

Time Deposits .06-.10

Brokered Deposits .11-.13

Dormant Accounts .14

Closed Accounts .15

Other Deposit Services .16

The Payments Function and Services .17-.32

Regulatory Matters .33-.40

Limitations on Brokered Deposits .33-.38

Classification of Deposits of Credit Unions .39-.40

Accounting and Financial Reporting .41-.46

Auditing .47-.70

Objectives .47

Contents 2016, AICPA

Table of Contents xxiii

Chapter Paragraph

13 Deposits—continued

Planning .48-.49

Internal Control Over Financial Reporting and Possible

Tests of Controls .50-.55

Substantive Tests .56-.70

14 Federal Funds and Repurchase Agreements .01-.69

Introduction .01-.24

Federal Funds Purchased .02-.03

Repos .04-.25

Regulatory Matters .26

Accounting and Financial Reporting .27-.47

Auditing .48-.69

Objectives .48

Planning .49-.53

Internal Control Over Financial Reporting and Possible

Tests of Controls .54-.58

Substantive Tests .59-.69

15 Debt .01-.77

Introduction .01-.31

Long Term Debt .06-.09

Short Term Debt .10-.31

Regulatory Matters .32-.33

Accounting and Financial Reporting .34-.57

Auditing .58-.77

Objectives .58

Planning .59

Internal Control Over Financial Reporting and Possible

Tests of Controls .60-.63

Substantive Tests .64-.77

16 Income Taxes .01-.36

Introduction .01-.13

Banks and Savings Institutions .03-.09

Other .10-.12

Credit Union .13

Regulatory Matters .14-.17

Accounting and Financial Reporting .18-.30

Deferred Tax Assets and Liabilities .21-.23

Temporary Differences .24-.26

Financial Statement Presentation and Disclosure .27-.30

2016, AICPA Contents

xxiv Table of Contents

Chapter Paragraph

16 Income Taxes—continued

Auditing .31-.36

Objectives .31

Planning .32

Internal Control Over Financial Reporting and Possible

Tests of Controls .33-.34

Substantive Tests .35-.36

17 Equity and Disclosures Regarding Capital Matters .01-.115

Introduction .01

Banks and Savings Institutions .02-.46

Introduction .02

Equity .03-.10

Holding Company Equity and Regulatory Capital .11-.27

Disclosures for Banks and Savings Institutions .28-.37

Disclosure for Holding Companies .38-.40

Illustrative Disclosures for Banks and Savings Institutions (The example disclosures that follow are for

illustrative purposes only) .41-.46

Credit Unions .47-.64

Introduction .47

Members’ Equity .48-.54

New Credit Unions and Low Income Designated Credit Unions .55

Disclosures for Natural Person Credit Unions .56-.60

Illustrative Disclosures for Natural Person Credit Unions .61-.64

Corporate Credit Unions .65-.79

Introduction .65

Equity .66-.71

Disclosures for Corporate Credit Unions .72-.76

Illustrative Disclosures for Corporate Credit Unions .77-.79

Mortgage Companies and Mortgage Banking Activities .80-.84

Introduction .80

Disclosure for Mortgage Companies and Mortgage Banking Activities .81-.83

Illustrative Disclosures for Mortgage Companies and Mortgage Banking Activities .84

Regulatory Capital Matters for All Entities .85-.88

Regulatory Capital Disclosures for Branches of Foreign Institutions .85-.86

Regulatory Capital Disclosures for Trust Operations .87-.88

Auditing .89-.115

Banks, Savings Institutions, and Credit Unions .89-.105

Mortgage Companies and Activities .106-.115

Chapter Paragraph

18 Derivative Instruments: Futures, Forwards, Options, Swaps, and Other Derivative Instruments .01-.101

Introduction .01-.69

Risks Inherent in Derivatives .05-.13

Types of Derivatives .14-.52

Uses of Derivatives to Alter Risk .53-.64

Variations on Basic Derivatives .65-.69

Regulatory Matters .70-.78

Accounting and Financial Reporting .79-.100

Financial Statement Disclosures .95-.100

Auditing Considerations .101

19 Business Combinations .01-.41

Introduction .01

Regulatory Matters .02-.07

Accounting and Financial Reporting .08-.30

Purchase of a Loan or Group of Loans .18-.20

Loans and Debt Securities Acquired With Deteriorated Credit Quality .21

Special Considerations in Applying the Acquisition Method to Combinations of Mutual Entities .22-.25

Impairment and Disposal Accounting for Certain Acquired Long Term Customer Relationship Intangible Assets .26-.27

Branch Acquisitions .28-.30

Auditing Considerations .31-.41

20 Fair Value .01-.68

Introduction .01

Accounting and Financial Reporting .02-.63

Definition of Fair Value .02-.27

Valuation Techniques .28-.30

Present Value Techniques .31-.33

The Fair Value Hierarchy .34-.37

Measuring the Fair Value of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) .38-.41

Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has Significantly

Decreased .42-.47

Using Quoted Prices Provided by Third Parties .48

Disclosures .49-.60

Fair Value Option .61-.63

Auditing Considerations .64-.68

Chapter Paragraph

21 Trust and Asset Management Activities .01-.30

Introduction .01-.12

Personal Trusts .08-.09

Corporate Trusts .10

Employee Benefit Trusts .11

Common or Collective Trust Funds .12

Regulatory Matters .13-.14

Accounting and Financial Reporting .15-.16

Auditing .17-.30

Objectives .17

Planning .18

Internal Control Over Financial Reporting and Possible Tests of Controls .19-.21

Financial Reporting Controls of the Trust .22

Substantive Tests Related to Financial Statement Audits .23-.24

Substantive Procedures Related to the Trust .25-.29

Audits of Unit Investment Trusts .30

22 Insurance Activities .01-.70

Introduction .01-.10

Types of Insurance Coverage .02

Credit Life .03-.05

Credit Accident and Health .06

Property and Liability .07

Writing Policies .08-.09

Commissions .10

Regulatory Matters .11

Accounting .12-.68

Premium Income .13-.17

Acquisition Costs .18-.50

Investment Portfolios .51-.54

State Laws .55

Commissions .56-.59

Consolidation Policy .60-.64

Financial Statement Presentation .65-.68

Auditing .69-.70

23 Reporting Considerations .01-.38

Introduction .01

Forming an Opinion on the Financial Statements .02-.04

Reports .05-.37

Unmodified Opinion .05-.06

Chapter Paragraph

23 Reporting Considerations—continued EOM and Other-Matter Paragraphs Added to the Independent Auditor’s Report .07-.14

Modified Opinions .15-.21

Financial Statements Prepared in Accordance With a Special Purpose Framework .22-.23

Members’ Shares Reported as Equity .24

Communication of Internal Control Related Matters .25-.27

Reports on Supervisory Committee Audits .28-.33

Example Report on the Application of Agreed-Upon Procedures Performed in Connection With a Supervisory Committee Audit .34

Example Reports on the FDIC Loss Sharing Purchase and Assumption Transactions .35-.36

Small Business Lending Fund Auditor Certification Guidance .37

Appendix A—Illustrative Unqualified PCAOB Reports .38

Appendix

A FDI Act Reporting Requirements

B Regulatory Reporting Matters—Interpretation and Reporting Related to U.SGAAP

C Information Sources

D Overview of Statements on Quality Control Standards

E The New Revenue Recognition Standard: FASB ASU No2014-09

F The New Leases Standard: FASB ASU No2016-02

G Accounting for Financial Instruments

H Schedule of Changes Made to the Text From the Previous Edition

Index of Pronouncements and Other Technical Guidance

Subject Index

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Author Information

Founded in 1887, the American Institute of Certified Public Accountants (AICPA) represents the CPA and accounting profession nationally and globally regarding rule-making and standard-setting, and serves as an advocate before legislative bodies, public interest groups and other professional organizations. The AICPA develops standards for audits of private companies and other services by CPAs; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and monitors and enforces compliance with the accounting profession’s technical and ethical standards.

The AICPA’s founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, a licensing status and a commitment to serving the public interest.
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