Question

For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date?

A) Withdrawals from Federal Bank of more than $5 million must include a manager's signature.

B) At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals.

C) Federal Bank has just started establishing trusts for its customers and it has only set up ten such trusts. Before making an investment for a trust, bank employees must verify that the investment is in accordance with stated investment policies.

D) On an annual basis, Federal Bank management performs credit checks on its loan customers before determining the value of loans it will not be able to collect on.

Answer 1

An auditor is least likely to test the internal control in option D closer to the "as of" date because it occurs on an annual basis. Controls that are applied more frequently require internal tests closer to the period they're intended to safeguard. Bank supervision by agencies ensures the overall financial health and risk management of banks like the Federal Bank.

Step-by-step explanation:

An auditor would be least likely to perform tests of internal controls closer to the "as of" date for the control described in option D: "On an annual basis, Federal Bank management performs credit checks on its loan customers before determining the value of loans it will not be able to collect on." This is because the activity is performed on an annual basis, suggesting that performing tests closer to the "as of" date may not add significant value, as the process is not conducted frequently throughout the year. In contrast, controls that are implemented on a daily or per-transaction basis tend to require more immediate testing to ensure their effectiveness over the period under audit.

Internal controls are essential for ensuring the accuracy and integrity of the financial reporting process and for preventing fraud. Activities such as daily cash reconciliations and manager's signatures on large withdrawals are examples of controls that are typically tested more frequently by auditors. This is because they have a more direct and ongoing impact on the financial transactions of the institution.

Bank Supervision practices include monitoring banks' balance sheets and conducting on-site reviews by bank examiners, ensuring that institutions like the Federal Bank maintain a positive net worth and manage risks appropriately. The Office of the Comptroller of the Currency and other agencies like the FDIC play a crucial role in overseeing these practices and providing deposit insurance to protect depositors.