Internal Control Questionnaires and Verification Procedures
Letters of Credit
Test the addition of the trial balances and the reconciliation of the trial balances to the general ledger.
Using an appropriate sampling technique, select letters of credit from the trial balance, and:
Prepare and mail confirmation forms to account parties of letters of credit issued (exclude confirmed letters of credit as they are covered in d. below).
Note: Letter of credit participations serviced by other institutions should be confirmed only with the servicing institution. Letter of credit participations serviced for other institutions should be confirmed with the buying (participating) institution and the account party. Confirmation forms should be done in the name of the bank, on its letterhead, and returned to its auditing department with a code designed to direct such confirmations to the examiners. Confirmation forms should include account party, letter of credit number, amount, commission charged, and brief description of collateral, if any.)
After a reasonable time, mail second requests.
Follow-up on any no-replies or exceptions, and resolve differences.
Determine if the bank’s confirmation forms agree with incoming tested cable and subsequent written follow-up instructions from the issuing bank.
Examine letters of credit and accompanying documentation for completeness by determining:
That they are supported by the required application with officer approval.
That all the documents listed in the covering letter have been received, and the letter of credit relates to the draft and documents submitted. Check the letter of credit number of draft.
If the letter of credit has expired or been canceled.
That the available balance of the letter of credit is sufficient to cover the draft amount.
If the exporter is making partial shipments when the letter of credit allows only one shipment to be made for the full amount.
If the beneficiary of two letters of credit combines the shipment and presents only one set of documents.
If the bill of lading is a straight or order instrument.
That the bill of lading is endorsed to the bank.
That the bill of lading is not “foul” or “on deck,” unless specifically allowed.
That the commercial invoice does not exceed the amount available under the letter of credit.
If the weight list detailing each shipping container and its weight certificate stipulating the weight of the merchandise as a whole is signed and agrees with amounts shown on other documents.
That there is a copy of the packing list for each copy of the merchandise invoice.
That the insurance policy or certificate is properly endorsed and covers the specific risks enumerated in the letter of credit, that the amounts are correct, and that the description of the goods conforms to that on the letter of credit.
That the inspection certificate attesting to the quality, quantity, and condition of the merchandise is the same on all other documents.
That the information on the certificate of origin agrees with the requirements of the letter credit.
That any required consular invoices are present.
Check to see that the required authorized signature of an approving officer is on each letter of credit form whether issued or confirmed.
Check to see that the letter of credit issued appears to be genuine.
Determine that proper assignments, hypothecation agreements, etc. are on file.
Test the pricing of any negotiable collateral.
Determine that collateral margins are reasonable and in line with bank policy and legal requirements.
List all collateral and documentation discrepancies, and investigate.
Determine if any collateral is held by an outside custodian or has been temporarily removed for any reason.
Forward a confirmation request on any collateral held outside the bank. (Confirmation forms sent should be done in the name of the bank, on its letterhead, and returned to its auditing department with a code designed to direct such confirmations to the examiners.)
Determine that each file contains documentation supporting counter-guarantees or letters of credit, where appropriate.
Review letter of credit participation agreements, making excerpts where necessary for such items as rate of service fee, interest rate, remittance requirements, and determine compliance.
Review customer ledgers to determine compliance with line authorizations and letter of credit agreement terms.
Review the commission accounts relating to issuing, amending, confirming, and negotiating letters of credit by:
Reviewing and testing procedures for accounting for commissions and the handling of adjustment.
Scanning commissions for any unusual entries and following up on any unusual items by tracing them to initial and supporting records.
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