Magazine article The CPA Journal

Audits of Credit Unions

Magazine article The CPA Journal

Audits of Credit Unions

Article excerpt

The AICPA has issued an updated audit and accounting guide, Audits of Credit Unions. The new guide supersedes the AICPA audit and accounting guide of the same name originally issued in 1986. Prepared by the Credit Unions Committee, the guide contains modified guidance due to the issuance of authoritative pronouncements since the guide originally was issued.

The primary objective of this guide is to help independent auditors audit and report on the financial statements of natural-person credit unions. The new guide is not intended to apply to corporate credit unions; however, portions of the guide may be useful to auditors in their work related to corporate credit unions.

General Planning Issues

The scope of the services rendered by auditors generally depends on the types of reports to be issued as the result of the engagement. Early in the audit, the auditor should establish an understanding with credit union management regarding the services to be performed and reports to be issued. The following types of services typically are performed by auditors engaged by credit unions:

Auditing the financial statements in accordance with generally accepted auditing standards.

Applying agreed-upon procedures to assist the supervisory committee in fulfilling its responsibilities.

Reporting on internal controls.

Reporting on supplemental financial and other information.

Applying agreed-upon procedures to management assertions related to mortgage-banking activities in accordance with Statements on Standards for Attestation Engagements.

Reporting on the processing of transactions by credit unions functioning as service organizations in accordance with SAS No. 70, Reports on the Processing of Transactions by Service Organizations.

Unique Industry Characteristics. To plan an audit of the financial statements of a credit union, the auditor should be familiar with the characteristics of the operations and business of credit unions unique to the industry and require the auditor's consideration in assessing audit risk, developing an overall audit strategy, and performing auditing procedures. Some of those characteristics include

the regulatory environment,

financial products and instruments,

the internal control environment, and

the economic environment.

Industry Risk Characteristics. Credit unions face several different types of risk with respect to the investing and lending activities that encompass the major part of their operations. Some of these risks are as follows:

Credit Risk. The probability that a borrower may not repay a loan.

Interest-Rate Risk. The probability that changes in interest rates will negatively affect earnings.

Liquidity Risk. The probability a cred it union will not have funds available to repay fully all maturing liabilities on a timely basis.

Processing Risk The risk that the accuracy and timeliness of information processed by credit unions could be impaired.

Sound business policies suggest that the board of directors and management of a credit union should review risk exposure and devise a policy for the management of those risks.

Knowledge of the Client's Business This requirement is generally obtained through experience with the client and discussions with other auditors or client personnel. Such knowledge may also be obtained or supplemented by performing procedures such as a) reviewing the charter and bylaws of the credit union and b) reading minutes of meetings of the board of directors, the supervisory committee, the credit committee (or the loan officers or both), and other appropriate committees.

Internal Control Issues

Several procedures are particularly important to credit union operations. If in place and functioning properly, the following procedures could strengthen internal controls.

Daily reconciliations of all loan, deposit, and related interest trial balances with the general ledger. …

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