Moranda and Sills, LLP, has served for over 10 years as the auditor
of the financial statements of Highland Bank and Trust. The firm is conducting its audit
planning for the current fiscal year and is in the process of performing risk assessment
procedures. Based on inquiries and other information obtained, the auditors learned
that the bank is finalizing an acquisition of a smaller community bank located in another
region of the state. Management anticipates that the transaction will close in the third
quarter, and, while there will be some challenges in integrating the IT systems of the
acquired bank with Highland systems, the bank should realize a number of operational
cost savings over the long-term.
During the past year, the bank has expanded its online service options for customers,
who can now remotely deposit funds into and withdraw funds from checking and savings
accounts. The system has been well received by customers and the bank hopes to continue
expanding those services. The challenge for Highland is that they are struggling to retain IT
personnel given the strong job market for individuals with those skills.
Credit risk management continues to be a challenge for all banks, including Highland,
and regulators continue to spend a lot of time on credit evaluation issues. The bank has adedicated underwriting staff that continually evaluates the collectibility ofloans outstanding.
Unfortunately, some of the credit review staff recently left the bank to work for a competitor.
Competition in the community banking space is tough, especially given the slow
loan demand in the marketplace.
The bank has expanded its investment portfolio into a number of new types of instruments
subject to fair value accounting. Management has engaged an outside valuation
expert to ensure that the valuations are properly measured and reported.
Fortunately, the bank's capital position is strong and it far exceeds regulatory minimums.
Capital is available to support growth goals in the bank's three-year strategic
a. Describe any risks of material misstatement at the financial statement level.
b. Describe any risks of material misstatement at the assertion level.
c. Which, if any, risks would be considered a significant risk?
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