You are the Senior on audit of Old Western Stage Bank.You have been asked to look at the Bank’s process of determining their provision for bad debts for the period and their allowance for loan loss.As part of your review of your staff’s work you noted the following notations in the workpapers:
OWSB has developed a reasonable estimate of its a provision for bad debts and allowance for loan loss.In determining the correct amounts the bank analyzes homogenous loans such a credit card using an aging of outstanding balances, adjusting for forecasts and analysis of economic factors that could effect the Bank’s ability to collect on credit card balances.In addition, the bank computes the appropriate allowance amounts for individual loans contained in its commercial real estate portfolio.Each loan is analyzed individually based on factors such as occupancy rates, with appropriate adjustments made for economic forecasts and analysis of the commercial real estate market.Finally, the bank adds an additional unallocated allowance.We spoke with Mr. Higherarca, the Chief Risk Office at the bank to determine what factors were considered in determining the additional unallocated allowance portion.He stated that these amounts were put into the allowance to cover future loans that the bank would make.
Based on the above information answer the following questions.Your answer should be at least one page long.
1. Do you agree with your staff’s conclusions?State your reasons and provide FASB Accounting Standard Codification citation as support for your conclusions.Format your citation correctly (Topic-Subtopic-Section-Paragraph).
2. Are there changes to FASB requirements in this area that might influenceyour answer for future periods? (For example, applying the same facts to a future year’s audit.If so, cite the Accounting Standard Update that might influence your answer. Include the effective dates of any ASU.
3. What next steps would you take with your staff and Bank management.Include in your answer specific steps.For example, would you ask for a meeting with Mr. Higherarca?Would you ask to meet with the Bank President?What guidance would you provide to your staff?Or, would you simply sign-off on your staff’s workpaper?
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