QUIZ-1 AASI Banks-Financial-Institutions-etc PDF

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Polytechnic University of the Philippines Sta. Mesa Manila College of Accountancy and Finance ACCO 30073 – Auditing and Assurance: Specialized Industries QUIZ 1 – Banks, Financial Institution, Insurance, BPO and MiningPart I. True or false. Select the best answer. (1 point each) A specialized indust...

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Polytechnic University of the Philippines Sta. Mesa Manila College of Accountancy and Finance ACCO 30073 – Auditing and Assurance: Specialized Industries QUIZ 1 – Banks, Financial Institution, Insurance, BPO and Mining Part I. True or false. Select the best answer. (1 point each) 1. A specialized industry is not necessarily rare or even unusual. 2. A specialized industry are likely to have specific financial reporting standards applicable to them or have distinct accounting policies developed to account for specialized transactions and balances which are based on the normally-applied financial reporting standards. 3. When accepting an audit engagement involving a specialized industry, the audit firm needs to consider the competence of the audit firm to perform the engagement and disregard the time and resources needed. 4. Auditors may use an industry expert to obtain audit evidence. 5. Identification of the risk of material misstatement in a specialized industry is approached in the same was as in any other audit – by obtaining appropriate understanding of the business and its environment. 6. All business process outsourcing companies are call centers. 7. Sending out letters to know how much is the actual cash balance in the bank account of the company at the end of the fiscal period addresses the testing of completeness, existence and accuracy of the cash balance in an audit in BPO industry. 8. Property and equipment may be one of the significant accounts in auditing a client operating in a BPO industry because they are usually asset-heavy. 9. To test the completeness, existence and accuracy of service income, vouching of service contracts may be done. 10. In auditing a client operating under the BPO industry, IT controls should be an audit consideration. 11. Environmental matters does not in any way affect the mining and exploration industry. 12. An auditor considers that they may be environmental contingencies and liabilities because clients under mining industries tend to be exposed to significant environmental risks. 13. In testing the completeness, existence, accuracy and valuation of Mine Site Development and Exploration Rights, a confirmation of estimated remaining minerals with a surveyor or internal research and development/geosciences is done. 14. Development costs are not recognized as an asset in a mining company. 15. The measurement and recognition of asset impairment is an important issue in the mining industry because mining operations typically require a high level of capital investment in order to develop, extract and process minerals. 16. An underwriter’s role shall be limited to the following: I. Assessing the risk that is presented; II. Deciding whether or not to accept the risk or how much to accept; III. Fix the terms, conditions and scope of coverage to be offered; and IV. Calculate suitable premium; a. b. c. d.

I and II I and III I and IV I, II, III, and IV

17. The starting point of a claim is for the ______________________________________. The final outcome ______________________________________. a. insurance company to confirm approval as the covered event occurs; is the settlement of the claim b. policyholder to notify the insurer that the event has occurred; can be settlement or rejection of the claim c. insurance company to authorize the release of funds after all the facts have been confirmed; can be settlement or rejection of the claim d. the actuary to complete all estimation of damages and valid claims, also known as “reserving”; is the settlement of the claim

18. ____________ are internet-based distribution channels which rely on the cooperation of insurers and intermediaries to access their pricing for different risks; aim to work with a number of insurers and intermediaries and therefore cut across the traditional boundaries between direct and indirect distribution channels a. Aggregators b. Reinsurers

c. Retrocession d. Banks e. None of the above 19. All of the following are the documents included in an insured’s claims folder except: I. Preliminary loss report II. Proposal form III. Copy of policy IV. Notice of claim V. Affidavit of Loss VI. Adjuster’s preliminary report/status report VII. Approved adjuster’s final report VIII. Adjuster’s billing statement IX. Surveys used by surveyors during the claims process X. Offer letter a. b. c. d.

II and V II and IX V and IX IX and X

20. Shown below is a risk-based audit approach guide when auditing insurance. Which of the following shall be interchanged to correct the table? LOW RISK Gov’t bonds, t-bills, cash Captive covers only risks of parent and affiliates and audits the parent and affiliates and no sign’t audit issues noted Single, direct policy

HIGH RISK Multiple owners/insureds/users Single parent and primary/only users of f/s are parent co and regulators.

Multiple fronting company arrangements Multiple reinsurers Low severity losses or Management estimates of reserves

Property business No reinsurance Product, professional environmental liability business Actuarial study with good quality data Claims controls at claim handler, parent Junk Bonds Actively traded equities with readily determinable/quoted market values Custody is separate from accounting

Poor controls Derivatives Junk bonds Unquoted equities Poor controls to monitor results

a. No reinsurance - Low severity losses b. Product, professional or environmental liability business - Single parent and primary/only users of f/s are parent co and regulators. c. Junk Bonds - Low severity losses d. Custody is separate from accounting - Unquoted equities a. b. c. d.

a and b a and d b and c c and d

Part II. Problem Solving. Solve the required for each cases presented and encode your answers in MS forms. (2 points each) Problem 1. While auditing Babel Financials, Inc., Vincenzo noted the below claims which could qualify as exceptions: a. The sum insured under Tae Ho’s personal accident policy is P300,000 for loss of a limb. He loses an arm in an accident and claims under the policy. b. The limit of liability under Spacesweepers Ltd.’s public liability is P60,000,000. A customer makes a successful liability claim against them and damages of P90,000,000 are awarded. c. Inzaghi’s motor policy is subject to a P3,000 damage excess. She makes a claim for damage to her car caused while she was parked by an unknown third party at P47,000. d. Wusang Office Supplies insured their warehouse contents against theft for P1,500,000. They made a claim for P150,000 following a burglary and the loss adjuster reports that the total actual value of the warehouse contents is P3,000,000 – 2/3 of which are totally gone/destroyed. The policy is subject to an average clause. Vincenzo noted that where a claim is valid, there are some circumstances where it will be only partially met by the insurer, but all of these claims are fully indemnified by Babel per examination of case reserves. Babel did not enter into a reinsurance contract for these four policies. According to Luca, his manager, a full indemnity will not be provided to the insured where: a. The sum insured is less than the value of claim – the insurer’s liability is restricted to the sum insured; b. The average clause operates – where the policyholder has under-insured their property; c. An excess applies – the insured is responsible for the first amount of a claim; or d. A franchise exists – the insurer pays out once a limit has been reached. However, Luca emphasized that the insurer can make an ‘ex-gratia’ payment even though there is no valid cover – to enhance the image and reputation of the insurer or to avoid undue hardship for the insured. Determine the following: 21. How much shall be payable to Tae Ho? 22. How much shall be payable to Spacesweepers, Ltd.? 23. How much shall be payable to Wusang Office Supplies? 24. How much is the understatement (overstatement) in Babel’s books for Inzaghi’s motor policy if Vincenzo further noted that there is an unrecorded ex-gratia payment of P1,000 to Inzaghi? 25. All of the above information including #4 considered, give the entry to correct the balances of Claims Payable and Case Reserves/Direct Losses. Problem 2. Binaluyo Bank of Asia (BBA) originates a 2,000 bullet loan with a total gross carrying amount of P500,000. BBA segments its portfolio into borrower groups (Groups Lascano and Noleal) on the basis of shared credit risk characteristics at initial recognition. Group Lascano comprises 1,000 loans with a gross carrying amount per client of P200, for a total gross carrying amount of P200,000. Group Noleal comprises 1,000 loans with a gross carrying amount per client of P300, for a total gross carrying amount of P300,000. There are no transaction costs and the loan contracts include no options (for example, prepayment or call options), premiums or discounts, points paid, or other fees. BBA measures expected credit losses on the basis of a loss rate approach for Groups Lascano and Noleal. In order to develop its loss rates, BBA considers samples of its own historical default and loss experience for those types of loans. In addition, BBA considers forward-looking information, and updates its historical information for current economic conditions as well as reasonable and supportable forecasts of future economic conditions. Historically, for a population of 1,000 loans in each group, Group Lascano's loss rates are 0.3 per cent, based on four defaults, and historical loss rates for Group Noleal are 0.15 per cent, based on two defaults. On December 31, 2021, BBA expects an increase in defaults over the next 12 months compared to the historical rate. As a result, BBA estimates five defaults in the next 12 months for loans in Group Lascano and three for loans in Group Noleal. The average lifetime of the loans is 3 years and the discount rate of BBA is 5%.

Determine the following: 26. What is the loss rate that will be used by BBA to estimate the 12 month expected credit losses on new loans in Group Lascano on December 31, 2021? 27. What is the loss rate that will be used by BBA to estimate the 12 month expected credit losses on new loans in Group Noleal on December 31, 2021?

28. How much is the amount of allowance for expected credit losses for Group Lascano as of December 31, 2021? 29. How much is the amount of allowance for expected credit losses for Group Noleal as of December 31, 2021? 30. How much is the net realizable value of the loans as of December 31, 2021? Problem 3. Per examination of Marley Capital Partner’s (“Marley”) financials, the following information were noted: Note 1 – Interest Rate Swap: On January 1, 2021, Marley received a 3-year, P10,000,000 loan bearing an interest equivalent to T-bill plus 6%. The T-bill rate will be the rate on January 1 of each year. The interest is payable the end of each year while the principal will be repaid on December 31, 2023. The T-bill rate on January 1, 2021 is 4%. In conjunction with this loan, Marley entered into an interest rate swap with Tybur Financials, a finance company. Under this arrangement, Marley will be paying finance company 10% while the finance company will be paying Marley T-bill plus 6%. The swap payments will be made every December 31. On January 1, 2022 the T-bill rate is 5% while on December 31, 2022 and December 31, 2023, the rates are 2% and 4%, respectively. Marley erroneously used the interest rates on December 31 of each year in measuring the hedged item. Note 2 – Foreign Current Loan: Marley obtained a INR300,000 loan on December 31, 2021 from Eldia Bank, an Indian company. The loan is payable on December 31, 2024 while the interest based on market rate is payable every September 30. The interest rate on the loan is based on the interest rate every September 30, (i.e. interest for the first year is based on September 30, 2021, interest for the second year is based on September 30, 2022 and so on.) The exchange rate on September 30, 2021 is INR1=PHP0.64. Because of the volatility of foreign exchange rate, the company negotiated a special forward contract to buy Rupees on September 30, 2024 with Ymir Investment Bank for INR1=Php0.50. This is to hedge the principal on the loan. Marley paid the loan on September 30, 2024. The forward contract was also settled on the same date. Date Forex Rate September 30, 2022 0.67 September 30, 2023 0.60 September 30, 2024 0.58 The bank adopts the fiscal year accounting period ending September 30. The discount rates on various dates are as follows: Date Discount rate September 30, 2021 7% September 30, 2022 8% September 30, 2023 6% September 30, 2024 9% Determine the following: 31. For Note 1, how much is the audited balance of Unrealized Gain (Loss) – OCI at 12/31/2021? 32. For Note 1, what is the balance per books of derivative asset (liability) at 12/31/2022? 33. Give the proposed adjusting journal entry to correct the balances incorporated in Note 1, assuming that the errors were only discovered in 2022, our first year of audit for Marley. (Use the word debit for debited account(s) and use the word credit for credited account(s), e.g. debit cash 1,000 credit UGOL – OCI 1,000) 34. For Note 2, how much will be the Gain (Loss) on forward contract in December 31, 2022? 35. How much will be the interest expense of Marley in its 2022 Audited Financial Statements? Problem 4. The following audited balances of loans and receivables were provided to you by United Badyang World Bank (UBWA) as of December 31, 2020:

Loan category Corporate Loans Housing Loans Small Business Loans Individual Loans Total

Gross Amount P123,918,277 97,192,910 56,192,681 39,172,536 P316,476,404

ECL P9,293,871 5,831,575 2,809,634 1,566,901 P19,501,981

Average loan Effective interest 5% 6% 7% 3%

ECL loan classification Underperforming Underperforming Performing Performing...