Credit risk and loan portfolio audit
What the exam tests
This domain tests audit of credit underwriting, approval, monitoring, classification and impairment. Questions often focus on collateral, related-party lending, MFRS 9 staging and whether portfolio data supports the reported allowance.
Core rules and concepts
- Credit risk governance includes credit strategy, risk appetite, delegated authority, independent credit review and concentration limits.
- Underwriting assessment commonly applies the 5Cs: character, capacity, capital, collateral and conditions. Approval must occur before disbursement, with covenants and conditions properly recorded.
- Monitoring includes current financial statements, covenant compliance, collateral revaluation, watch-list reviews and early arrears action.
- MFRS 9 staging: Stage 1 recognises 12-month expected credit loss, Stage 2 lifetime ECL after significant increase in credit risk, and Stage 3 lifetime ECL for credit-impaired exposures. The 90-days-past-due presumption is rebuttable with evidence.
- Forbearance and restructuring must be identified and assessed for loss; cured status requires evidence of sustained repayment.
Worked example
A sample of 50 corporate loans is selected from the watch-list. Seven files lack financial statements dated within 18 months, and two have collateral valuations older than three years. The credit monitoring control is not operating effectively. The auditor evaluates whether the stale data affected staging or the ECL allowance, tests whether management identified the deterioration through another control, and projects the exception to the watch-list population. The report states the condition, the affected population, the risk of understated impairment and the required remediation.
Traps
- Testing approval only and ignoring post-disbursement monitoring.
- Accepting collateral value without haircuts, legal enforceability or forced-sale assumptions.
- Treating a restructured loan as cured without repayment evidence.
- Ignoring single-name and sector concentration.