You were hired by the BOD of ABC Coopto audit the cooperative's loan receivable account for the year 2020. The schedule of loan receivable balances is presented below:

1 - Loan Balances as of December 31, 2020:

Loan product Secured Loan

Not Due P 22,500,000

Past Due P5,750,000

Total P28,250,000

Loan Loss ProvisionP 850,000

Loan product Regular Loan

Not Due 8,200,000

Past Due5,000,000

Total13,200,000

Loan Loss Provision350,000

Loan product Special Loan

Not Due13,700,000

Past Due8,400,000

Total22,100,000

Loan Loss Provision500,000

TOTAL

Not Due44,400,000

Past Due19,150,000

Total63,550,000

Loan Loss Provision 1,700,000

Your examination of the cooperative's accounting records and credit policy revealed the following:

1-The Board of Directors on one of their meetings approved to established a loan loss provision of 2% allowance for not due loans and 5% for past due loan.The cooperative manager Ms. Santosinsisted that they did not strictly apply that provision for secured loan since those loans are backed up by collaterals either TCT or chattel mortgage.

2-Secured loan of P2.0M extended to Ms. Ardiente, one of the members of the BOD, has been past due for almost a year.This loan has been secured by a 1.5 hectare agricultural lot located at the foot of Mt. Banahaw.

3-The cooperative has policy about SBL (single borrower's limit) of P5M.However, the management failed to implement it when Ms. Cruz, a well known successful businesswoman in barangay borrowed P10M two years ago and failed to settle in full her obligation in due time.The balance (special loan) amounting to P8.4M became past due.

4-Regular loan balance includes loan of the following borrowers:

Ms. Dizon( Chairman of the Board) ----------------P 250,000borrowed Nov. 13, 2020

Without co-makers signature; term

2 years; quarterly installment

Payments; 6% interest per annum

Share capital - P100,000

Ms. Santos(Manager)-----------------------------300,000borrowed January 2, 2019; term

3 years; 6% interest; monthly inst.

Share capital - P 80,000

Ms. Go( member of the Board) --------------------250,000Borrowed June 30,2018

Term - 2 years ; 6% interest

Term loan

Share Capital - P30,000

Ms. Garcia( non member) --------------------------------375,000Borrowed on Sept. 30, 2017

Term - 3 years

Interest rate - 9% per annum

A friend of Ms. Dizon

5 -Cooperative's loan policy stated among others the following provisions:

a.A uniform interest rate per annum of 9% will be charged to borrowers of Secured, Regular and Special loans.

b.No penalty will be charged to past due or delinquent accounts.

c.Only residential house and lot, and/or residential lot within the location (area of cooperative's operation) can be accepted as collateral.Collateral will be subjected to appraisal by independent expert assigned by the board.

d.Regular and Special loans should be backed up by co-maker or guarantor.One co-maker if the loan applied is P100,000 below; 2 co-makers for P100,000 to P300,000 ; and three co-makers for above P300,000.

e.Member can avail secured loan and special loan of a maximum amount of up to five times (5x) of their share capital.

Questions:

1.Identify the risks involved in the cooperative's lending operations.

2.Write you audit findings and recommendations to the Board of Directors of ABC Coop.