Sarah is an audit senior with Childs, Maxwell and Weaver, LLP, Sarah specializes

Question

Sarah is an audit senior with Childs, Maxwell and Weaver, LLP, Sarah specializes in auditing loan loss reserved for financial institution clients. This current year she has noticed that two of her financial institution clients in town have written loans off to a loan customer, Mr. T (fictional name to protect the guilty). Mr. T is well known in town as a highly successful real estate developer and businessman with many different business dealings. As Sarah is auditing her third financial institution client in town, she notices that the bank has loans of $3.5 million outstanding to Mr. T. The current loan loss reserve. Ms. Childs, senior partner of the audit, wants to know how the audit firm can justify the increase loan reserve account. What can and should Sarah disclose about Mr. T?

Explanation / Answer

Sarah can definitely discuss with Ms Childs about her previous experience with two financial institutions where the loans to Mr T has been written off. As the same risk is appliable to the curent client also , the client should take sufficient provision for possible loss.

As an Auditor , it should be Sarah's duty to apprise Ms Childs regarding the credit wrthiness of Mr T so that the client can be made aware of the possible loss. However , the matter has to be discussed and handled in a confidential manner to avoid any repurcussion .

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