Internal Control Questionnaires and Verification Procedures

Verification Procedures

1. Foot subsidiary records for all leases for which the operating method of accounting is used, and reconcile to the general ledger control.

2. Obtain or prepare a listing of unpaid monthly rentals for all leases for which the financing method of accounting is used, and:

   1. Reconcile to the general ledger.

3. Using appropriate sampling techniques, select leases from the listing, and:

   1. Prepare and mail confirmation forms to lessee. A confirmation form should include a description and location of the property, monthly or annual rentals, terms, and other major provisions and options.

   2. Prepare and mail confirmation forms to lenders and trustees in leveraged lease transactions. Verify the outstanding balance of lender’s note receivable and the terms.

   3. Determine that an order to purchase was executed before the bank was committed to the purchase and delivery of the property.

   4. Determine that the files contain bills of sale, invoices, titles, or other evidence of ownership for the property leased.

   5. Ascertain that a properly executed noncancelable lease is held.

   6. Determine that the bank has obtained recorded ground leases or waivers from real property owners and/or mortgage holders on which the leased property is located.

   7. Review insurance coverage, and determine that property damage coverage is adequate relative to book value and that liability insurance is in effect.

   8. Determine that periodic inspection reports are being received.

   9. Where a lease is to a corporation, determine that corporate resolutions to lease have been executed.

   10. Check computation of depreciation.

   11. Check monthly payments being made to loan participants in leveraged leasing transactions for proper recording of interest expense.

   12. Ascertain compliance with Internal Revenue Code on all major tax-oriented leases.

4. For leases selected above which were contracted since the last examination and for which the operating method of accounting is used:

   1. Agree the bank’s capitalized cost of the property to purchase invoices and payment drafts.

   2. Check computation of investment tax credit.

5. For leases selected above which were contracted since the last examination and for which the financing method of accounting is used:

   1. Agree the capitalized lease payments to the lease agreements.

   2. Agree the entries made to the unearned income-leasing account.

   3. Trace to proper recording in general ledger.

   4. Check the computation of investment tax credit.

6. Obtain a listing of unearned income-leasing account, and agree the total to the general ledger liability account.

7. Ascertain the bank’s policy for establishing the depreciable life of leased property, and:

   1. Determine that depreciation schedules for leased property are consistent and in accordance with generally accepted accounting principles.

   2. Test the footings of the depreciation schedules.

   3. Trace depreciation expense from depreciation schedules to the subsidiary and general ledgers.

8. Review leases terminated since the previous examination:

   1. Test for reasonableness of sale price.

   2. Check the computation of gain or loss on the sale, and trace sale proceeds to the general ledger.

9. Determine that any deterred tax liability or investment tax credit is accurately reflected.

10. Review yields computed by the bank or lease packager, and:

    1. Determine whether the bank inflates actual yield by netting residual value from equity investment and by applying tax benefits at inception of lease.

    2. Determine that yields on lease transactions are being accurately reported to the board of directors or its committee.

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