Moranda and Sills, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assessment procedures.
Based on inquiries and other information obtained, the auditors learned that the bank is finalizing an acquisition of a smaller community bank located in another region of the state. Management anticipates that the transaction will close in the third quarter, and, while there will be some challenges in integrating the IT systems of the acquired bank with Highland's systems, the bank should realize a number of operational cost savings over the long term.
During the past year, the bank has expanded its online service options for customers, who can transfer funds and make electronic payments from checking and savings accounts. The system has been well received by customers and the bank hopes to continue expanding those services. The challenge for Highland is that they are struggling to retain IT personnel given the strong job market for individuals with those skills.
Credit risk management continues to be a challenge for all banks, including Highland, and regulators continue to spend a lot of time on credit evaluation issues. The bank has a dedicated underwriting staff that continually evaluates the collectibility of loans outstanding. Unfortunately, some of the credit review staff recently left the bank to work for a competitor. Competition in the community banking space is tough, especially given the slow loan demand in the marketplace.
The bank has expanded its investment portfolio into new types of instruments subject to fair value accounting. Management has engaged an outside valuation expert to ensure that the assets are appropriately valued and reported. Fortunately, the bank's capital position is strong and it far exceeds regulatory minimums. Capital is available to support growth goals in the bank's 3-year strategic plan.
Requirement a. Describe any risks of material misstatement at the financial statement level. (Select all that apply.)
Requirement b. Describe any risks of material misstatement at the assertion level. (Select all that apply.)
Requirement c. Which, if any, risks would be considered a significant risk?
-------would be considered as significant risks in the current year's audit.
0 1. 2. 03. The acquisition of another bank was not a recommendation from the auditor; therefore, it is a risky investment. The integrity and competency of personnel from the acquired bank who join Highland could have a pervasive impact on the quality of financial reporting of the combined bank, if they lack integrity or competency. Challenges associated with retaining key personnel with IT skills could have a pervasive effect on a number of financial statement accounts, if those individuals leave Highland and there are issues related to the performance of IT systems that impact financial reporting. The bank should not have dedicated underwriting staff. The evaluation of the collectibility of loans outstanding should be performed by the bank president only, in order to reduce the risk of error. 4. The expansion into new types of investments subject to fair value accounting where the bank does not have employees with the appropriate valuation skills and competencies increases the risks of material misstatement related to the accuracy and realizable value balance related audit objectives, which impact the accuracy, valuation and allocation assertion. Risks of material misstatements may also affect several of the presentation assertion for investments. 06. o 7. Any challenges associated with the integration of IT systems of the acquired bank with Highland's systems could trigger errors in a number of financial statement accounts, if the IT systems affected impact financial reporting. The integration of the pending acquisition of the small community bank into Highland's operations and financial reporting processes may trigger the potential for misstatements across a number of accounts that must be in reporting system. The accounting for assets and liabilities acquired can be complex and there are a number of valuation and disclosures issues that may lead to increased risks of misstatements in those accounts and disclosures. 8. 9. The expansion of online service options for customers could trigger risks across a number of accounts, given customers use online options to make deposits and withdraw funds from both checking and savings accounts. As online service options increase, more financial statement accounts may be impacted. Challenges related to credit evaluation may ultimately lead to misstatements in the allowance for loan loss reserves, impacting the realizable value balance-related audit objective (the accuracy, valuation and allocation assertion). Risks of material misstatements may also affect several of the presentation and disclosure related assertions for loans outstanding, including disclosures related to loan loss reserves. 10. The expansion of online service operations may affect the occurrence, completeness, and accuracy of checking and savings account transactions. If there are flaws in the online system, deposits might be overstated due to fictitious deposits or errors in the amounts recorded, thereby affecting the occurrence and accuracy assertions related to those transactions. If transactions are 1. 2. The acquisition of another bank was not a recommendation from the auditor; therefore, it is a risky investment. Any challenges associated with the integration of IT systems of the acquired bank with Highland's systems could trigger errors in a number of financial statement accounts, if the IT systems affected impact financial reporting. The expansion into new types of investments subject to fair value accounting where the bank does not have employees with the appropriate valuation skills and competencies increases the risks of material misstatement related to the accuracy and realizable value balance related audit objectives, which impact the accuracy, valuation and allocation assertion. Risks of material misstatements may also affect several of the presentation assertion for investments. 4. Challen Challenges related to credit evaluation may ultimately lead to misstatements in the allowance for loan loss reserves, impacting the realizable value balance-related audit objective (the accuracy, valuation and allocation assertion). Risks of material misstatements may also affect several of the presentation and disclosure related assertions for loans outstanding, including disclosures related to loan loss reserves. 05. The expansion of online service operations may affect the occurrence, completeness, and accuracy of checking and savings account transactions. If there are flaws in the online system, deposits might be overstated due to fictitious deposits or errors in the amounts recorded, thereby affecting the occurrence and accuracy assertions related to those transactions. If transactions are not properly posted to the correct customer accounts, misstatements related to the posting and summarization transaction-related audit objective may occur. 06. 7. The bank should not have dedicated underwriting staff. The evaluation of the collectibility of loans outstanding should be performed by the bank president only, in order to reduce the risk of error. The integrity and competency of personnel from the acquired bank who join Highland could have a pervasive impact on the quality of financial reporting of the combined bank, if they lack integrity or competency. 8. The expansion of online service options for customers could trigger risks across a number of accounts, given customers use online options to make deposits and withdraw funds from both checking and savings accounts. As online service options increase, more financial statement accounts may be impacted. 09. The integration of the pending acquisition of the small community bank into Highland's operations and financial reporting processes may trigger the potential for misstatements across a number of accounts that must be integrated into the financial reporting system. The accounting for assets and liabilities acquired can be complex and there are a number of valuation and disclosures issues that may lead to increased risks of misstatements in those accounts and disclosures. 10. Challenges associated with retaining key personnel with IT skills could have a pervasive effect on a number of financial statement accounts, if those individuals leave Highland and there are issues related to the performance of IT systems that impact financial reporting. processes may trigger the potential for misstatements across a number of accounts that must be inte assets and liabilities acquired can be complex and there are a The risks noted in part a ncreased risks of misstatements in those accounts and disclosu | key personnel with IT skills could have a pervasive effect on a The risks noted in part b als leave Highland and there are issues related to the performa The risks noted in part a and part b None of the risks noted above considered a significant risk? The risks noted in part a and part b would be considered as significant risks in the current year's audit. Click to select your answer(s). 0 1. 2. 03. The acquisition of another bank was not a recommendation from the auditor; therefore, it is a risky investment. The integrity and competency of personnel from the acquired bank who join Highland could have a pervasive impact on the quality of financial reporting of the combined bank, if they lack integrity or competency. Challenges associated with retaining key personnel with IT skills could have a pervasive effect on a number of financial statement accounts, if those individuals leave Highland and there are issues related to the performance of IT systems that impact financial reporting. The bank should not have dedicated underwriting staff. The evaluation of the collectibility of loans outstanding should be performed by the bank president only, in order to reduce the risk of error. 4. The expansion into new types of investments subject to fair value accounting where the bank does not have employees with the appropriate valuation skills and competencies increases the risks of material misstatement related to the accuracy and realizable value balance related audit objectives, which impact the accuracy, valuation and allocation assertion. Risks of material misstatements may also affect several of the presentation assertion for investments. 06. o 7. Any challenges associated with the integration of IT systems of the acquired bank with Highland's systems could trigger errors in a number of financial statement accounts, if the IT systems affected impact financial reporting. The integration of the pending acquisition of the small community bank into Highland's operations and financial reporting processes may trigger the potential for misstatements across a number of accounts that must be in reporting system. The accounting for assets and liabilities acquired can be complex and there are a number of valuation and disclosures issues that may lead to increased risks of misstatements in those accounts and disclosures. 8. 9. The expansion of online service options for customers could trigger risks across a number of accounts, given customers use online options to make deposits and withdraw funds from both checking and savings accounts. As online service options increase, more financial statement accounts may be impacted. Challenges related to credit evaluation may ultimately lead to misstatements in the allowance for loan loss reserves, impacting the realizable value balance-related audit objective (the accuracy, valuation and allocation assertion). Risks of material misstatements may also affect several of the presentation and disclosure related assertions for loans outstanding, including disclosures related to loan loss reserves. 10. The expansion of online service operations may affect the occurrence, completeness, and accuracy of checking and savings account transactions. If there are flaws in the online system, deposits might be overstated due to fictitious deposits or errors in the amounts recorded, thereby affecting the occurrence and accuracy assertions related to those transactions. If transactions are 1. 2. The acquisition of another bank was not a recommendation from the auditor; therefore, it is a risky investment. Any challenges associated with the integration of IT systems of the acquired bank with Highland's systems could trigger errors in a number of financial statement accounts, if the IT systems affected impact financial reporting. The expansion into new types of investments subject to fair value accounting where the bank does not have employees with the appropriate valuation skills and competencies increases the risks of material misstatement related to the accuracy and realizable value balance related audit objectives, which impact the accuracy, valuation and allocation assertion. Risks of material misstatements may also affect several of the presentation assertion for investments. 4. Challen Challenges related to credit evaluation may ultimately lead to misstatements in the allowance for loan loss reserves, impacting the realizable value balance-related audit objective (the accuracy, valuation and allocation assertion). Risks of material misstatements may also affect several of the presentation and disclosure related assertions for loans outstanding, including disclosures related to loan loss reserves. 05. The expansion of online service operations may affect the occurrence, completeness, and accuracy of checking and savings account transactions. If there are flaws in the online system, deposits might be overstated due to fictitious deposits or errors in the amounts recorded, thereby affecting the occurrence and accuracy assertions related to those transactions. If transactions are not properly posted to the correct customer accounts, misstatements related to the posting and summarization transaction-related audit objective may occur. 06. 7. The bank should not have dedicated underwriting staff. The evaluation of the collectibility of loans outstanding should be performed by the bank president only, in order to reduce the risk of error. The integrity and competency of personnel from the acquired bank who join Highland could have a pervasive impact on the quality of financial reporting of the combined bank, if they lack integrity or competency. 8. The expansion of online service options for customers could trigger risks across a number of accounts, given customers use online options to make deposits and withdraw funds from both checking and savings accounts. As online service options increase, more financial statement accounts may be impacted. 09. The integration of the pending acquisition of the small community bank into Highland's operations and financial reporting processes may trigger the potential for misstatements across a number of accounts that must be integrated into the financial reporting system. The accounting for assets and liabilities acquired can be complex and there are a number of valuation and disclosures issues that may lead to increased risks of misstatements in those accounts and disclosures. 10. Challenges associated with retaining key personnel with IT skills could have a pervasive effect on a number of financial statement accounts, if those individuals leave Highland and there are issues related to the performance of IT systems that impact financial reporting. processes may trigger the potential for misstatements across a number of accounts that must be inte assets and liabilities acquired can be complex and there are a The risks noted in part a ncreased risks of misstatements in those accounts and disclosu | key personnel with IT skills could have a pervasive effect on a The risks noted in part b als leave Highland and there are issues related to the performa The risks noted in part a and part b None of the risks noted above considered a significant risk? The risks noted in part a and part b would be considered as significant risks in the current year's audit. Click to select your answer(s)
