Internal Control Questionnaires and Verification Procedures
Demand Deposits
Determine the number of the last unissued draft of each “due from bank” and “due from foreign bank demand account,” and record for comparison when performing reconcilement.
Prepare, or request that bank personnel prepare, a listing of all due from bank accounts together with their balances from the bank’s daily statement as of examination date. Listing should give separate totals for Federal Reserve Bank, due from banks—domestic, and due from banks—foreign. The due from foreign banks should also give separate totals for due from central banks, overdrawn nostro accounts, and due from affiliated banks—demand. Compare each total to the appropriate subtotal in the general ledger as of examination date.
Request the bank to arrange for a cut-off statement as of the examination date and for a subsequent cut-off statement, not less than 5 days later, for each due from account. The request for subsequent cutoff statements does not apply to foreign banks. Include instructions that the statements be addressed to the examiner-in-charge and be delivered unopened. Instructions for foreign banks should be performed in the name of the bank, on its letterhead, and returned to its auditing department with a code designating that the statements be submitted to the examiners unopened.
Arrange to have the Federal Reserve Bank statement and any other cut-off statements delivered unopened to the examiner daily for several days subsequent to the examination date.
Send “Request for Detailed Statement of Account” form requesting verification of balances and information on potential and existing liabilities. (This step does not apply to foreign banks.)
In preparing or reviewing reconcilement:
Review reconciling items carefully to determine that the time period between debit or credit entries by the bank under examination and the offsetting credit or debit by the correspondent bank is comparable for similar types of items. If any differences in timing occur, ascertain the reason.
Determine that wire transfers appear on the correspondent statement the same day as entered on the bank’s books. Determine the reason for any exception.
Test all drafts included in cut-off statement for authorized signature, proper endorsement, dates of drafts, payee, and amounts, and determine that:
Date drawn is not subsequent to date paid by the correspondent bank.
Drafts issued to transfer funds from the bank’s account to the correspondent’s account are not outstanding more than the normal transit time.
All drafts are numbered.
Drafts are issued sequentially.
Using an appropriate sampling technique, select due from bank accounts, and reconcile on a reconcilement form using the following steps:
Note: Unless controls and audit procedures are extremely lax or suspect, the examiner-in-charge should waive the actual reconcilement of the account and direct that such procedures be performed on all due from accounts by bank personnel under the supervision of an examiner. Before turning the cut-off statements over to bank personnel for reconcilement, the examiner should photostat them to prevent alteration. The examiner should obtain a copy of the reconcilement when completed and, for the accounts selected in the sample, should determine accuracy, and test the reconcilement for correctness.
Insert “our balance to their debit” and the date as shown on the general ledger.
If overdrawn balance, show on line “our balance to their credit.”
Insert “their balance to our credit” and the date as shown on the correspondent bank’s cut-off statement.
If overdrawn balance, show on line “their balance to our debit.”
Prove the mathematical accuracy of prior reconcilement by a machine run of the figures.
Determine that “our balance to their debit” agrees to general ledger as of their prior reconcilement date.
Determine that “their balance to our credit” agrees to correspondent bank’s statement as of the prior reconcilement date.
Determine that the closing balance and date listed on the statement used in the bank’s last reconcilement agrees to the opening balance and date listed on the cut-off statement as of the examination date.
If any intervening cut-off statements were received, determine that new opening balances and dates always agree with the previous statements’ closing balances and dates.
Check any open “we debit - they do not credit” item from the previous reconcilement to determine if credit has been given on a later cut-off statement from correspondent.
Do the same for any “we credit - they do not debit” item to determine if debit has been made on later cut-off statement from correspondent.
Check any open “they debit - we do not credit” item from the previous reconcilement to determine if a credit has been made to the bank’s general ledger.
Do the same for any “they credit - we do not debit” item to determine if a debit has been made to the bank’s general ledger.
If any items on a previous reconcilement do not clear, list on the reconcilement form being prepared.
Determine that each debit and credit entry shown on bank’s general ledger since date of last reconcilement is offset by a corresponding credit or debit on correspondent bank’s cut-off statement.
If a debit or credit is posted in error, the item may “clear” by an offsetting credit or debit on the general ledger, if made by the bank under examination, o
Any items on the general ledger, except outstanding drafts, that are not offset by an appropriate debit or credit on the correspondent bank’s cut-off statement are considered “open” and should be transferred to the reconcilement form under the appropriate “we debit” or “we credit” caption along with the date and a brief description.
Any items on the correspondent bank’s cutoff statement that are not offset by an appropriate debit or credit on the bank’s general ledger are considered “open” and should be transferred to the reconcilement form under the appropriate “they debit” or “they credit” caption along with the date and a brief description.
“We credit” items that represent drafts outstanding should not be listed on the “we credit” section of the reconcilement form. Each outstanding draft should be listed by number on the reverse side of the reconcilement form, and the total should be carried forward opposite the caption “drafts outstanding.” Included in the listing should be any drafts still outstanding from the previous reconcilement.
Prove the reconcilement by totaling the right-hand and left- hand columns on the reconcilement form. Proof is established when the two balances agree.
Determine clearance of “we debit” and “we credit” items using later cut-off statements, when available, and:
Carefully determine that all debits on or about the date of examination are satisfactorily accounted for and are not an attempt to conceal a shortage.
Enter dates cleared on the reconcilement form under heading “date since credited” or “date since debited.”
Indicate that the entry was proper and that transit time was normal by circling clearance date on reconcilement form.
If item is cleared by reversing the entry, that is, by a subsequent offsetting debit or credit entry on the ledger of bank under examination, check the entry through to its source.
If the entry involves excess transit time, confirm to the correspondent bank.
Investigate all large items to the ledger to determine that they are legitimate.
All material “we debit” and “we credit” items that do not clear on later cut-off statements received should be confirmed, with a copy of the confirmation tracer retained for comparison with the original after it is returned. If time does not permit the return of the confirmation tracer during the examination, the return envelope should be directed to the regional office and the copy of the confirmation tracer should be sent to the regional office for comparison. For foreign banks, confirmation forms and return envelopes should be prepared:
By bank staff under examiner supervision.
On bank letterhead and signed by the auditor.
By using the bank’s return address with a code designed to direct such routings to the examiner.
A record of “we debit” and “we credit” items that are not considered material should be retained for review at the next examination to determine the propriety of their disposition.
Utilizing general ledger or appropriate subsidiary ledger, determine clearance of “they debit” and “they credit” items, such that:
All items should clear during examination either by offsetting credit or debit to bank’s ledger or by the correspondent bank reversing entry.
Enter dates cleared on the reconcilement form under the heading “date since credited” or “date since debited.”
The reason for nonclearance should be determined for all “they debit” and “they credit” items that do not clear in a reasonable amount of time. The validity of the reason for nonclearance should be established and documented on the reconcilement form. Any material items that are not satisfactorily resolved should be brought to the attention of the examiner-in-charge.
Indicate, on the master listing of all due from bank accounts, next to each bank balance, that the account has been reconciled and that open items have been cleared or confirmed. When open items have been subsequently verified, indicate that fact.
Using appropriate sampling techniques, select due from foreign bank demand accounts from the listing obtained in step 2, and:
Trace profit or loss entries resulting from the revaluation of net open spot positions that were passed to the respective due from foreign bank demand (nostro) accounts.
Check that at the maturity of a forward exchange contract, proper entries are made to the respective due from foreign bank demand (nostro) accounts and forward revaluation adjustment accounts.
Test to be sure that when “swap” forward contracts are delivered, the correct entries are passed to the applicable due from foreign bank demand (nostro) accounts and swap adjustment account.
Investigate any one-sided entries, that is, an entry only to the foreign currency ledgers but not to the dollar (or local currency) book value ledgers which might disclose kiting or fraud.
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