Internal Control Questionnaires and Verification Procedures
Verification Procedures
Test the additions of the trial balances and their reconciliation to the general ledger.
Using appropriate sampling technique, select bankers’ acceptances from the trial balances, and:
Prepare and mail confirmation forms to:
Account parties for Customer Liability on Acceptances.
Sellers and purchasers of acceptance and acceptance pool participations.
Note: All confirmation forms should be done in the name of the bank, on its letterhead, and returned to its auditing department with a code designed to direct such confirmations to the examiners. Acceptances purchased from other institutions, either whole or in part, should be confirmed only with the selling institution. Acceptances sold to other institutions, whether whole or in part, should be confirmed with the buying institution and the account party.
Account party confirmation forms should include drawer name, date, date of acceptance, maturity date, amount, and related letter of credit number, if applicable. Participations sold or purchased confirmation forms should include: purchaser (or seller) name; date participation was sold (purchased); maturity date of participation; whether purchase (or sale) includes all or a portion of a particular acceptance or group of identified or unidentified acceptances; amount(s); fee charged; and if the purchaser (or seller) has recourse to the bank (or vice versa) in the event of default by the account party through a repurchase agreement or bank acknowledgment of its liability as guarantor or endorser).
After a reasonable time, mail second requests.
Follow-up on any no-replies or exceptions, and resolve differences.
Examine bankers’ acceptance record copies and own acceptances purchased for completeness by determining that they:
Are drawn and signed by the party shown as the beneficiary of the letter of credit.
Are dated.
Are drawn under the proper letter of credit number.
Have tenors in accordance with letter of credit terms.
Are properly endorsed if an endorsement is required.
Show amounts in figures and words that agree.
Are drawn on the drawees indicated in the letter of credit.
Show amounts not exceeding the balance available under the letter of credit.
Indicate amounts equal to the total value of the respective invoices unless otherwise stipulated in the terms, e.g., drafts for 70 percent of invoice value.
Have no restrictive endorsements such as “for deposit only” if the acceptance is to be discounted.
Do not include the words “without recourse” with regard to either the drawer or endorsers.
Check to see that the required initials of approving officer are on the acceptance.
Check to see that the acceptance is signed, appears to be genuine, and is negotiable.
Compare collateral, e.g., trust receipts and warehouse receipts, with the description on the collateral records.
Check to be sure that procedures are in effect to preclude a customer from obtaining additional credit extensions on the same merchandise.
Determine that the proper assignments, hypothecation agreements, security agreements, etc., are on file.
Test the pricing of negotiable collateral, if any.
Determine that collateral margins are reasonable and in line with bank policy and legal requirements.
List all collateral discrepancies and investigate.
Determine if any collateral is held by an outside custodian or has been temporarily removed for any reason.
Forward a confirmation request on any collateral held outside the bank. (Confirmation forms should be prepared in the name of the bank, on its letterhead, and returned to its auditing department with a code designed to direct such confirmations to the examiners.)
Determine that each file contains documentation supporting guarantees and subordination agreements, where appropriate.
Determine that any required insurance coverage is adequate and that the bank is named as loss payee.
Review bankers’ acceptance participation agreements making excerpts, where necessary, for such items as rate of service fee, interest rate, remittance requirements, and determine whether customer has complied.
Review ledgers and authorizations, and determine if authorizations are signed in accordance with terms of the acceptance agreements.
Review acceptance fees, discount charges, and brokerage fees relating to own acceptances rediscounted and acceptances of other banks purchased by:
Reviewing and testing procedures for accounting for acceptance fees, discount charges, and brokerage fees, and for handling of adjustments.
Scanning for any unusual entries and following up on any unusual items by tracing them to initial and supporting records.
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