27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Internal controls for bank lending

Pacific Bank provides loans to businesses in the community through its Commercial Lending Department. Small loans (less than $100,000) may be approved by an individual loan officer, while larger loans (greater than $100,000) must be approved by a board of loan officers. Once a loan is approved, the funds are made available to the loan applicant under agreed-upon terms. Pacific Bank has instituted a policy whereby its president has the individual authority to approve loans up to $5,000,000. The president believes that this policy will allow flexibility to approve loans to valued clients much quicker than under the previous policy.

As an internal auditor of Pacific Bank, how would you respond to this change in policy?

To determine

Internal Control: Internal control refers to the policies, and plans of the business organization along with other measures with a view to safeguard its assets, encourage the employees to adhere to the plans, to improve on the operational efficiency, and to ensure correct and reliable accounting information. Internal control is a process which ensures continuous reliability of accomplishment of a company’s objectives, related to operations, financial reporting, and in conformity with laws and regulations.

The following are the some of the internal control procedures:

  • Competent personnel, rotating duties, and mandatory vacations
  • Separating responsibilities for related operations
  • Separating operations, custody of assets, and accounting
  • Proofs and security measures

To state: the response to the change in policy

The bank faces some normal business risk when there is default in the bank loans. This can be reduced by making a proper evaluation of the loan applications. When larger loans are compared with the smaller loans, former causes greater risks. Thus, only one person must be involved while deciding granting of a large loan...

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