Final answer:
Auditing procedures and strong internal controls are essential in financial management. Banks are expected to manage assets and liabilities carefully and plan for potential loan defaults. Calculating a bank's net worth involves setting up a balance sheet and subtracting liabilities from assets.
Step-by-step explanation:
The situation described involves a challenge in the accounting processes of a client, specifically in auditing the ending accounts payable balance which is a significant portion of the total liabilities. This highlights the importance of internal controls and the role of auditors in verifying financial information. For example, in the provided scenario, Noel found an error in an equipment bill, preventing a $250,000 overpayment. Such diligence is critical in financial management.
In banking, the management of assets and liabilities is central to a bank's viability. Banks must plan for loan defaults and maintain adequate reserves. An unexpected rise in defaults, as might occur during a recession, can drastically reduce a bank's assets and potentially result in a negative net worth, as illustrated in the scenario where the Safe and Secure Bank's loans declined in value from $5 million to $3 million.
To calculate a bank's net worth, one must set up a T-account balance sheet. For a bank with deposits of $400, reserves of $50, government bonds worth $70, and loans of $500, the balance sheet would reflect these totals under assets and liabilities. The net worth is determined by subtracting total liabilities from total assets.