Internal Control Questionnaires and Verification Procedures
Verification Procedures
Perform appropriate verification procedures to test the integrity of management information and ensure that practices are consistent with approved policies and procedures
NOTE: Examiners performing a review of an active position-taker’s interest rate risk management system should use these verification procedures in conjunction with the verification procedures for interest rate risk in the Comptroller’s Handbook.
Determine whether there are adequate controls to ensure that all derivative transactions are captured for risk reporting (e.g., population controls).
Trace and recalculate a selected sample of risk positions on management reports using supporting data and policy formulae. Ensure that model formulae are consistent with those outlined in the Policy.
Select a sample of transaction-level profit and loss reports and reconcile to management profit and loss reports for the same day to ensure that all profits and losses were reported.
Select a sample of revaluation reports and trace to supporting data to ensure that independent prices were obtained. Where trader’s prices were used, ensure that an appropriate level of management approved those prices.
Select a sample of price and credit limit exception reports and trace to supporting documentation to ensure that all exceptions were reported.
Select a sample of counterparties from the counterparty credit line report. Trace credit lines to credit line approval memoranda in the credit file to ensure that credit line information was input correctly.
Select a sample of counterparties with collateral or margining agreements. Trace counterparty names and applicable transaction terms to collateral safekeeping records. Send confirmations to the counterparties asking for verification of collateral held by the bank. Follow up on unanswered requests or exceptions and resolve differences.
Review reconciliation policies and procedures. Select a sample of general ledger and memoranda (e.g., collateral) accounts. Determine whether the accounts are authorized and whether reconciliations were performed according to policy.
Select a sample of deal tickets on various days originated by various traders and determine whether they contain the proper information, including:
Time and date executed.
Name of party executing the transaction.
Name of party entering transaction data.
Type of instrument, price, and amount.
Settlement or effective date.
Payment or settlement instructions.
Brokers’ fees or commissions and other expenses.
Ensure that deal tickets were input into the system in a timely manner. If any deals were amended, ensure that the proper approvals were obtained.
Using the sample of deal tickets used for #9, ensure that the transactions are consistent with that day’s:
Subsidiary ledgers.
General ledger.
Profit and loss reports.
Net position report and comparison with limits.
Maturity gap report.
Confirmations.
Brokers’ advice.
During the review of deal tickets in #9, identify large transactions and ensure that the bank is not conducting unauthorized trading with undisclosed counterparties. Such transactions may be identified by comparing the names of counterparties listed on deal tickets to their business purposes and financial capacity; instances of a clear lack of capacity to pay or inconsistency with the party’s business purpose may indicate transactions involving undisclosed counterparties.
Select a sample of held-over deal tickets and determine whether they were input the next day.
Select a sample of simple and complex deals. Verify that the confirmations were prepared and sent by individuals other than the trader. Ensure that the return address is the back office and not the trading desk.
Select an appropriate sample period to review transaction tape recordings. With the assistance of an audit representative, gain access and listen to the tapes. Evaluate the way in which sales people and traders solicit and execute transactions.
Select a sample of incoming confirmations and check that they were sent to the back office and not to the trading desk.
Identify contracts for which incoming confirmations have not yet been received as well as those that show unresolved discrepancies with incoming confirmations.
Unless bank personnel have taken follow-up action too recently all to expect response, prepare and mail confirmation forms to include counterparty name, currency denominations and amounts, rate, transaction date, maturity date, and settlement instructions, if applicable.
Select accounts from the trial balance and:
Prepare and mail confirmation forms to include information cited in #16.
After a reasonable time, mail second requests.
Follow up on any unanswered requests or exceptions and resolve differences. Confirmation forms and return envelopes should be prepared:
By bank staff under examiner supervision.
On bank letterhead and signed by the auditor.
Using the bank’s return address with conspicuous markings to insure their direct routing to the responsible examiner.
In conjunction with audit, intercept at the bank’s mailroom all incoming confirmations for several days to determine whether any contracts have been made but not booked.
Ascertain that all intercompany deals are recorded and adequately controlled.
If applicable, test a sample of off-premise or after-hour trades and verify that they were transacted by authorized personnel and are otherwise within policy guidelines.
If applicable, test a sample of off-market deals to ensure that they were transacted by authorized personnel and are transacted within policy guidelines.
Review system authorization codes for different applications and determine that access is given only to appropriate personnel (e.g., a trader should not have access to the revaluation system) and that system applications support the segregation of duties. Check to ensure that system authorizations are reviewed regularly and that a terminated employee’s access is immediately revoked.
For collateral held by others, ensure that collateral description and details (e.g., type, quantity, rate, etc.) as shown on safekeeping confirmations agree with inventory schedules:
Investigate and resolve any discrepancies.
If the discrepancy cannot be resolved in a timely manner, inform the internal audit department of the situation and make appropriate arrangements for follow-up.
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