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, should be confirmed only with the servicing institution. Loans serviced for other institutions, either whole loans or participations, should be confirmed with the other institution and the borrower. Confirmation forms should include the borrower’s name, loan number, original amount, interest rate, current loan balance, contingency and escrow account balance, and a brief description of the collateral.)

   2. After a reasonable time period, mail second requests.

   3. Follow up on any no-replies or exceptions and resolve differences.

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

   5. In the event any notes are not held at the bank, request confirmation with the holder.

   6. See that required initials of approving officer are on the note.

   7. See that the note is signed, appears to be genuine, and is negotiable.

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

   9. List and investigate all collateral discrepancies.

   10. Determine if any collateral is held by an outside custodian or has been temporarily removed for any reason.

   11. Request confirmation for any collateral held outside the bank.

   12. Determine that each file contains documentation supporting guarantees and subordination agreements, where appropriate.

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

   14. Review participation agreements making excerpts, when deemed necessary, for such items as rate of service fee, interest rate, retention of late charges and remittance requirements and determine whether the customer has complied.

   15. Review loan agreement provisions for hold back or retention, and determine if undisbursed loan funds and/or contingency or escrow accounts are equal to retention or hold back requirements.

   16. If separate reserves are maintained, determine if debit entries to those accounts are authorized in accordance with the terms of the loan agreement and if they are supported by inspection reports, certificates of completion, individual bills, or other evidence.

   17. Review disbursement ledgers and authorizations, and determine if authorizations are signed in accordance with the terms of the loan agreement.

   18. Agree debits in the undisbursed loan proceeds accounts to inspection reports, individual bills, or other evidence supporting disbursements.

3. Review the accrued interest accounts and:

   1. Review procedures for accounting for accrued interest and handling of adjustments.

   2. Scan accrued interest and income accounts for any unusual entries and follow up on any unusual items by tracing to initial and supporting records.

4. Obtain or prepare a schedule showing the amount of monthly interest income and the real estate loan balances at the end of each month since the last examination and:

   1. Calculate or check yield.

   2. Investigate significant fluctuations or trends.

5. Using a list of non-accruing loans, check loan accrual records to determine that interest income is not being taken.

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