Internal Control Questionnaires and Verification Procedures

Verification Procedures

1. Test the additions of the trial balances and the reconciliation of the trial balances to the general ledger. Include loan commitments and other contingent liabilities.

2. Using an appropriate sampling technique, select loans from the trial balance and:

   1. Prepare and mail confirmation forms to borrowers. (Loans serviced by other institutions, either whole loans or participations, are usually confirmed only with the servicing institution. Loans serviced for other institutions, either whole loans or participations, should be confirmed with the buying institution and the borrower. Confirmation forms should include borrower’s name, loan number, the original amount, interest rate, current loan balance, borrowing base, and a brief description of the collateral.)

   2. After a reasonable time, mail second requests.

   3. Follow up on any unanswered requests for verification or exceptions and resolve differences.

   4. Examine notes for completeness and compare agree date, amount, and terms with trial balance.

   5. In the event the holder does not hold notes at the bank, request confirmation.

   6. Check to see that required initials of approving officer are on the note.

   7. Check to see that note is signed, appears to be genuine, and is negotiable.

   8. Compare collateral held in commercial loan files with the description on the collateral register.

   9. Determine that the proper collateral documentation is on file.

   10. Determine that margins are reasonable and in line with bank policy and legal requirements.

   11. List all collateral discrepancies and investigate.

   12. Forward a confirmation request on any collateral held outside the bank (e.g., by bonded warehouses).

   13. Determine that each file contains documentation supporting guarantees and subordination agreements, when appropriate.

   14. Determine that any required insurance coverage is adequate and that the bank is named as loss payee.

   15. Review participation agreements, excerpting when necessary such items as rate of service fee, interest rate, retention of late charges, and remittance requirements, and determine whether participant has complied. Review disbursement ledgers and authorizations, and determine whether authorizations are signed in accordance with terms of the loan agreement.

3. Review field audits and:

   1. Determine that on-site inspections are performed in conformance with bank policy.

   2. Consider making a physical inspection of the collateral when the quality or frequency of the bank’s inspections is not adequate.

   3. If physical inspections are made, compare the results with the bank’s records and investigate differences to the extent necessary.

4. Review accounts with accrued interest by:

   1. Reviewing and testing procedures for accounting for accrued interest and for handling adjustments.

   2. Scanning accrued interest for any unusual entries and following up on any unusual items by tracing them to initial and supporting records.

5. Using a list of nonaccruing loans, check loan accrual records to determine that interest income is not being recorded.

6. Obtain or prepare a schedule showing the monthly interest income amounts and the commercial loan balance at each month end since the last examination, and:

   1. Calculate yield.

   2. Investigate any significant fluctuations or trends.

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