INTERNAL ROUNTES AND CONTROLS - AUDIT Flashcards
4.2 IRC & AUDIT
Internal controls consists of five components that are part of the management process, what are they?
- Control Environment
- Risk Assessment
- Control Activities
- Information and Communication
- Monitoring Activities
4.2 IRC & AUDIT
What are the basic principles and procedures of an internal control system? OAPA
- Organization Structure
- Accounting Procedures
- Protection of Assets
- Audit Program
4.2 IRC & AUDIT
What are the elements of a bank’s organizational structure?
- Directors’ Approvals – limitations imposed by BOD with regard to authority levels
- Segregation of Duties – participation of two or more persons or departments in a transaction
- Rotation of Personnel – planned and unannounced rotation of personnel duties
- Sound Personnel Policies – should address hiring, training, and evaluation
- Vacation Policies – Officers and employees should be absent from their duties for an uninterrupted two weeks
4.2 IRC & AUDIT
What are the elements of a bank’s accounting procedures?
- Operating Responsibilities – designed to facilitate preparation of internal reports that correspond with duties
- Current Records – Records should be updated daily
- Subsidiary Control Accounts – Subsidiary ledger accounts (loans, deposits) should be kept in balance with GL
- Audit Trail – Records and systems should be designed to trace a given item as it passes through the books
- Pre-numbered Documents – Sequentially numbered instruments should be used whenever possible
- Accounting Manual – User guides should ensure that all like transactions are handled uniformly
4.2 IRC & AUDIT
What are the elements of a bank’s protection of assets?
• Cash Control – Tellers should have their own funds to which they have sole access
• Joint Custody or Dual Control
> Joint Custody is two or more persons are equally accountable for the physical protection of certain items or records
> Dual Control- the work of one person is verified or approved by another.
• Employee Hiring Procedures – Credit and previous employment should be checked by management
• Emergency Preparedness Plans – Written plans and off-premise storage of backup files should be maintained.
• Reporting Shortages – procedures for prompt reporting of shortages should be developed.
4.2 IRC & AUDIT
Part 364 requires each bank provide specific elements to be included within the internal audit program, what are the required elements?
- Adequate monitoring of the institution’s internal control system,
- Independence and objectivity,
- Qualified personnel,
- Adequate testing and review of information systems,
- Adequate documentation of tests and findings of any corrective actions,
- Verification and review of management’s actions to address material weaknesses, and
- Review by the audit committee or board of directors of the internal audit systems’ effectiveness.
4.2 IRC & AUDIT
What should the examiner focus on when evaluating internal controls?
- Structure
- Management, Staffing and Audit Quality
- Internal Audit
- Scope
- Communication
- Contingency Planning
4.2 IRC & AUDIT
All banks are strongly encouraged to establish an audit committee consisting of what?
Entirely of outside directors and, in appropriate circumstances, should be criticized for not doing so.
4.2 IRC & AUDIT
How often should the audit committee or board analyze the extent of the external auditing coverage need by the bank?
Annually
4.2 IRC & AUDIT
Part 363 of the FDIC Rules and Regulations establishes audit and report requirements for insured depository institutions with total assets of $500 million or more and their independent public accountants. What are the requirements?
- Engage an independent public accountant,
- Prepare annual financial statements in accordance with GAAP, and
- Produce annual reports.
4.2 IRC & AUDIT
What are the reporting requirements per Part 363 for insured depository institutions submitting reports and notifications to the FDIC, appropriate banking agency, and the State bank supervisor?
- Within 90 days after fiscal year end, an annual report must be filed. The annual report must contain audited annual financial statements, the independent public accountant’s audit report, management’s statements and assessments, and the independent public accountant’s attestation concerning the institution’s internal control structure and procedures for financial reporting.
- Within 15 days after receipt, the institution must submit any management letter; the audit report and any qualification to the audit report; and any other report, including attestation reports, from the independent public accountant.
- Within 15 days of occurrence, the institution must provide written notice of the engagement of an independent public accountant, the resignation or dismissal of a previously engaged accountant, and the reasons for such an event.
4.2 IRC & AUDIT
Part 363 requires certain filings from the independent public auditors, what are these requirements?
- The accountants must notify the FDIC and the appropriate Federal banking supervisor when it ceases to be the accountant for an insured depository institution.
- The notification must be in writing, must be filed within 15 days after the relationship is terminated, and must contain the reasons for the termination.
- The accountant must also file a peer review report with the FDIC within 15 days of receiving the report or before commencing any audit under Part 363.
4.2 IRC & AUDIT
What are the Audit Committee requirements of insured depository institutions with total assets of more than $3 billion, per Part 363?
- Two members of the audit committee must have banking or related financial management expertise;
- Large customers of the institution are excluded from the audit committee; and
- The audit committee must have access to its own outside counsel.
4.2 IRC & AUDIT
What are institutions that have $500 million or more in total assets as of the beginning of their fiscal year subject to?
- Subject to the annual audit and reporting requirements of Section 36 of the FDI Act as implemented by Part 363 of the FDIC’s Rules and Regulations.
- Some large institutions are also public companies or subsidiaries of public companies, and some institutions subject to Part 363 satisfy the requirements of the Act on a holding company basis.
4.2 IRC & AUDIT
The examiner’s principal efforts should focus on what when evaluating internal controls?
Detection, Exposure, and Correction of weaknesses in the banks records, operating systems, and auditing procedures
