Internal Control Questionnaires and Verification Procedures

Verification Procedures

1. Test the addition of the investment and money market holdings trial balances.

2. Test the reconciliations of the trial balances to the general ledger.

3. If investment or money market holdings are held in safekeeping at locations outside the bank, request the safekeeping agent to provide lists of securities held including name, description, par value, interest rate, due date, pledge status, and payment date of next coupon. (For international division securities, all requests and direct verification should be made in the name of the bank, on its letterhead, and returned to its audit department with a code designed to direct such information to the examiners.)

4. Using appropriate sampling techniques, select investment and money market holdings from the trial balances and:

   1. For investment and money market instruments held at the bank:

      • Examine and count the securities.

      • Compare details of certificates to trial balances.

      • If securities are pledged to secure the bank’s liabilities, determine that they are properly segregated from other securities.

      • Determine if coupons are intact.

      • Investigate any discrepancies.

   2. For investment and money market instruments not held at the bank:

      • Compare trial balance details to safekeeping receipts and the safekeeping agent’s confirmation list.

      • Determine that pledge status, if any, is properly noted on the safekeeping agent’s confirmation list.

      • Investigate any discrepancies.

   3. For investment and money market holdings purchased since the last examination:

      • Verify cost by examining invoices, broker’s advices, or other independent sources.

      • Determine that the securities were properly recorded in the general ledger.

      • Determine that the board of directors or its designated committee approved purchases.

      • For investment and money market holdings purchased at a premium or discount, test book value by:

        • Determining the bank’s method of calculating and recording amortization of premiums and accretion of discounts.

        • Determining the gross amount of premium or discount at purchase date.

        • Determining the period to maturity or call date.

        • Calculating the amount of premium remaining to be amortized or discount remaining to be accreted.

        • Determining that book value is reflected properly in the general ledger.

        • Investigating any discrepancies.

        • Scanning previously tested amortization or accretion schedules for investment or money market holdings acquired prior to the last examination and investigating any significant departure from these schedules.

5. Test gains and losses on disposal of investment securities since the last examination by sampling investment sales records and:

   1. Determining sales price by examining invoices or brokers’ advices.

   2. Checking computation of book value on settlement date.

   3. Calculating gain or loss and tracing the amount to its proper recording in the general ledger.

   4. Determining that the general ledger has been properly relieved of the investment, accrued interest, premium, discount, and other related accounts

   5. Determining that the board of directors or its designated committee approved sales.

6. Test accrued interest by:

   1. Determining the bank’s method of calculating and recording interest accruals.

   2. Obtaining trial balance(s) of accrued interest, if maintained separately from trial balances of investment and money market holdings.

   3. Testing the addition of the trial balance(s) and the reconciliation of the trial balance(s) to the general ledger.

   4. Determining that interest accruals are not being made on defaulted issues.

   5. Randomly selecting at least one of each type of the various investment and money market holdings selected as sample items in step 4 and:

      • Determining the interest rate and last interest payment date of coupons and money market instruments.

      • Calculating accrued interest and comparing it to the trial balance(s).

7. Obtain and prepare, for each kind of investment and money market holding, a schedule showing the accrued interest balance and the investment balance at the end of each quarter since the last examination, and:

   1. Calculate the ratios of accrued interest to investment balance for each type and time period.

   2. Investigate significant fluctuations and/or trends.

8. Obtain or prepare, for each kind of investment and money market holding, a schedule showing the monthly income amounts and the average monthly balance since the last examination, and:

   Note:This step should be performed only if the examiner-in-charge determines that it is necessary as an extension of similar computations made in NBSS reports.

   1. Calculate yield.

   2. Investigate significant fluctuations and/or trends.

9. If the bank is engaged in financial futures, forward placement, or stand-by contracts:

   1. Reconcile outstanding contracts to general ledger memoranda accounts.

   2. Determine the current market value (gross and net) of outstanding contracts.

   3. Confirm the existence of contracts with broker(s) doing business with the bank.

   4. For a sample of transactions currently outstanding and closed out since the last examination:

      • Verify cost and profit and loss by examining broker’s preliminary and final confirmations, margin calls, and margin runs.

      • Trace a sample of settlement funds and profit and loss entries to determine if they were properly recorded.

      • Determine if there is a high correlation between the contracts and offset to the contracts.

   5. Test fee income received by the bank in connection with the sale of a stand-by contract.

   6. Evaluate the credit risk exposure associated with various customers and dealers.

Previous: Conclusion Next: Lease Financing