Question

A bank's internal auditor wishes to determine whether all loans are supported by sufficient collateral, properly aged regarding current payments, and accurately categorized as current or noncurrent. The best audit procedure to accomplish these objectives would be to

A. Select a block sample of all loans in excess of a specified monetary limit and determine if they are current and properly categorized. For each loan approved, verify aging and categorization.
B. Use generalized audit software to read the total loan file, age the file by last payment due, and extract a statistical sample stratified by the current and aged population. Examine each loan selected for proper collateralization and aging.
C. Select a sample of payments made on the loan portfolio and trace them to loans to see if the payments are properly applied. For each loan identified, examine the loan application to determine that the loan has proper collateralization.
D. Select a discovery sample of all loan applications to determine whether each application contains a statement of collateral.

Answer 1

Utilizing generalized audit software to review the complete loan file, is the most effective method to ensure loans are properly collateralized and categorized. This method provides a comprehensive and efficient audit process. Option B is correct.

Step-by-step explanation:

The best audit procedure to determine whether all loans are supported by sufficient collateral, properly aged regarding current payments, and accurately categorized as current or noncurrent would be option B: Use generalized audit software to read the total loan file, age the file by the last payment due, and extract a statistical sample stratified by the current and aged population. Examine each loan selected for proper collateralization and aging. This approach allows for a comprehensive examination of the entire loan portfolio, ensuring a higher level of accuracy in the assessment of loan statuses and collateral backing.

It is important to ensure that each loan is backed by sufficient collateral and is properly categorized to avoid potential financial risks to the bank. A loan that is not safeguarded by collateral or inaccurately categorized could pose a significant risk. To mitigate these risks, methodology B provides an effective technique using modern tools that help in efficiently performing these audit tasks.