Certified Internal Auditor (CIA) Practice Test

What is the primary purpose of confirming loan balances with borrowers during an audit?

1. To determine interest rates.

2. To verify the collectability of the loan.

3. To assess the borrower's creditworthiness.

4. To evaluate loan approval processes.

The correct answer is: To verify the collectability of the loan.

The primary purpose of confirming loan balances with borrowers during an audit is to verify the collectability of the loan. This process involves obtaining direct communication from the borrower to ensure that the loan balance reported by the lender matches the borrower's records. This confirmation serves as an important assurance that the amounts due are accurate and that the borrower acknowledges their obligation to repay the loan. Understanding the collectability of a loan is crucial for auditors, as it directly impacts the financial health of the lending institution. If loan balances are not collectible, it presents a risk of financial loss, which could have implications for the broader financial reporting of the institution. Confirmation of loan balances not only supports the accuracy of financial statements but also provides insight into the potential risks associated with outstanding receivables. Other choices touch on related aspects of loan management, such as interest rates, creditworthiness, and approval processes, but these are not the primary focus of the confirmation process itself. The confirmation aims specifically at ascertaining the validity of the loan balance and, by extension, its likelihood of being collected.