Financial institutions usually require collateral as part of a lending agreement. For example, loans to build shopping centers usually require the property to be put up as collateral in case the borrower cannot repay the loan. The bank then takes title to the collateral. However, as reported by the GAO, many financial institutions, especially savings and loans, did not obtain adequate collateral or were overly optimistic on the value of collateral for many loans.

Required

a. Identify the controls a financial institution might implement to ensure that adequate collateral is obtained for loans.

b. During an audit of a financial institution, the auditor becomes concerned about the collateral that exists for some financial instruments in which the company has invested (such as collateralized receivables and mortgages). Develop an audit program to address the auditor's concerns regarding adequacy of collateral.

c. How would a deficiency in collateral affect the financial presentation of a company's investment account? Explain.