La. Admin. Code tit. 10 § III-705

Current through Register Vol. 50, No. 9, September 20, 2024

Section III-705 - Audit Program

A. Asset Accounts

1. Cash, Cash Items, Clearings, and Exchanges (Including Automatic Teller Machines and Related Settlement Accounts)

a. Count cash on a test basis and reconcile totals with the general ledger account.

b. Balance all categories of cash items and reconcile totals to the general ledger account; investigate any unusual or noncurrent items; trace disposition of selected amounts.

c. Confirm totals of clearings and exchanges direct with drawee banks or paying agents; trace disposition of selected incoming and outgoing return items.

d. Review and test the following:

i. procedures for safeguarding teller's cash during operating hours and relief and vacation scheduling;

ii. procedures for quarterly internal surprise cash counts. If the internal cash counts are performed adequately on a quarterly basis, the examiner need not count cash as a part of this examination;

iii. adequacy of dual control procedures over vault items;

iv. adequacy of review tellers' over and short activity.

2. Due from Banks

a. Obtain confirmation of balances as of the examination date.

b. Reconcile bank statements to the related general ledger accounts as of the examination date. Use subsequent statements to identify items that clear in a normal time period. Investigate all items still outstanding after that. Obtain a special cut-off statement as considered necessary.

c. Trace disposition of selected incoming and outgoing return items recorded by correspondents on examination date and at least two days thereafter.

d. Review control procedures for the origination of entries (i.e., incoming and outgoing wire transfers, IACHA items, etc.) and safeguarding of unissued drafts.

3. Investment Securities (and other assets considered as investment securities, plus Federal Funds Sold, Securities Purchased under Agreement to Resell, and Banker's Acceptances)

a. Reconcile subsidiary records for investments to the general ledger account and test significant reconciling items. Confirm with safekeeping agent, or if held in-house, physically inspect and check for proper safeguards.

b. On a test basis, verify correctness and authorization of original entries by references to minutes of investment committee or board of directors' and to purchase, sale, and maturity advices.

c. Reconcile accrued interest receivable subsidiary records to general ledger accounts and test significant reconciling items. Test the reasonableness of the individual balances by recalculating the accrued interest for a sample from each category of investment securities.

d. Test income recorded by investment category through comparison to average asset balances and investigate unusual fluctuations between balances and/or calculated rates.

e. For all securities, excluding marketable equity and trading account securities, reconcile unamortized premium and discount subsidiary records to general ledger accounts and test significant reconciling items. Test the reasonableness of the balances by recalculating the unamortized portion and comparing the recalculation to the bank's recorded unamortized premium/discount for a sample of investment securities.

f. Determine that the lower of cost or market values were appropriately applied to marketable equity securities, as well as assets held in trading accounts.

4. Commercial, Agricultural, Installment, Real Estate, Student, Credit Card Loans, and Discounts and Commercial Paper (and other assets considered as loans)

a. Reconcile subsidiary records for each loan category to the general ledger account and test significant reconciling items.

b. Reconcile accrued interest receivable subsidiary records to general ledger accounts and test significant reconciling items. Test the reasonableness of the individual balances by reviewing the accrual rates, recalculating the accrued interest, and comparing the recalculation to the bank's recorded accrued interest for a sample from each category of loans.

c. Test income recorded by loan category through comparison to average asset balances and investigate unusual fluctuations between balances and/or calculated rates.

d. Review and test the accrual procedures for manual systems by:

i. recalculating outstanding principal balances from loan rate records to the general ledger account for the date of the accrual;

ii. recalculating daily accruals on a test basis;

iii. reviewing related journal entries;

iv. reviewing the most recent note-by-note calculation of accrued interest and the related adjustment to the general ledger;

v. other steps as considered necessary.

e. Reconcile unearned income subsidiary records to general ledger accounts and test significant reconciling items. Test the reasonableness of the individual balances by recalculating the unearned income and comparing the recalculation to the bank's recorded unearned income for a sample of loans.

f. Direct confirmation with borrowers.

i. Mail negative confirmation requests to at least 10 percent number and dollar of each loan category, excluding participation loans purchased and sold.

ii. Confirm all participation loans purchased and sold. For participation loans purchased, secure a 100 percent positive confirmation with the selling bank. For participation loans sold, secure a 100 percent positive confirmation with the purchasing bank; negatively confirm 10 percent of the total balances with the borrower.

iii. Any positive confirmation request not acknowledged shall be followed by a second confirmation request. A listing of significant positive confirmation requests not acknowledged after mailing of both a first and second request shall be included in the report.

g. Review the allowance for loan losses.

i. Reconcile subsidiary records for charged-off loans to control record and test significant reconciling items.

ii. Check all significant charge-offs for proper authorization by the board of directors.

iii. Review test control procedures for loan charge-offs and recoveries.

iv. Mail confirmation requests to a selected number of customers whose loans have been charged-off, including some from prior years.

v. Trace details of activity recorded on individual charged-off loan records to the allowance for loan loss general ledger account on a test basis.

h. Compare the following information, where applicable, from subsidiary records to the loan document for all categories of loans on a test basis:

i. name(s) of borrower(s);

ii. original amount of loan (and current balance, if applicable);

iii. original interest rate (if interest rate has changed, trace to appropriate supporting documentation for the change);

iv. note date.

i. Schedule loans to officers, directors and their related interests and notate if any are on the institution's watch list.

5. Fixed Assets

a. Reconcile cost and accumulated depreciation subsidiary records to the related general ledger accounts and test significant reconciling items.

b. Test significant purchases and dispositions since the previous examination for proper authorization, classification. and recording, by reference to supporting documentation.

c. Review and test procedures for recording depreciation expense and related allowance for depreciation.

6. Other Assets

a. Reconcile pre-paid expense subsidiary records to the general ledger accounts and test significant reconciling items. Determine the reasonableness of the balances by comparing the original cost to supporting documentation, reviewing the amortization rate, recalculating the prepaid expense, and comparing the recalculation to the bank's recorded pre-paid expense on a test basis.

b. Reconcile the subsidiary records for other real estate and other tangible property to the general ledger accounts and test significant reconciling items. Review and test the accounting procedures for the recording of other real estate or other tangible property, including income and expense attributable to such property.

c. Evaluate transactions concerning the sale and financing of other real estate. Have transactions involving 100 percent financing or financing at less than market interest rates been properly booked in conformity with current accounting standards?

d. Review procedures for recording commercial and standby letters of credit issued to third parties and balance to the control record. Confirm on a test basis with the customer.

e. Review the calculations and propriety of deferred income tax charges as of the prior fiscal year-end and compare to the recorded amount.

f. Determine if the bank is involved in one or more of the following activities and, if so, perform the procedures indicated below.

i. Lease Financing. Test for compliance with generally accepted accounting principles.

ii. Discount Brokerage. Review and test procedures (including segregation of duties) over the execution of trades.

iii. Insurance and/or Real Estate Agency. Determine how the agency is owned. If the bank owns the agency, review and test significant assets and liabilities as considered appropriate. Review the adequacy of the accounting system.

iv. Real Estate Subsidiary

g. Review and test the propriety of any other asset accounts. Confirm and/or trace to supporting documentation as appropriate.

B. Liability Accounts

1. Deposits

a. Reconcile the subsidiary records for all deposit accounts by category to the general ledger account and test all significant reconciling items.

b. Review unposted items and debit and credit rejects, and follow through to ultimate return or posting for all significant items.

c. Mail negative confirmation requests to at least 10 percent number and dollar of each deposit category. Include a sample of due to bank accounts.

d. Reconcile subsidiary records for accrued interest payable to the general ledger accounts and test all significant reconciling items. Test the reasonableness of the individual balances by recalculating the accrued interest and comparing the recalculation to the bank's recorded accrued interest for a sample from each category of deposit accounts.

e. Test interest expense recorded by each deposit category through comparison to average liability balances and investigate unusual fluctuations between balances and/or calculated rates.

f. Review procedures for classifications of dormant and/or inactive accounts. as well as method of control over activity in such accounts. Test one day's reporting and supervisory review of activity.

g. Review procedures for the issuance and control of certificate of deposit forms as outstanding, voided, or redeemed. For at least two days subsequent to examination date, prove the total of all certificates redeemed by day. Review selected redeemed certificates for authorized signature and endorsements. Trace to the trial balance of certificates outstanding as of examination date to test for timely recording.

h. Obtain statement of treasury tax and loan account including any note-option account. Reconcile the statement with the general ledger accounts and test all significant reconciling items. Confirm balance(s).

i. Obtain a list of all internal deposit accounts. Review the controls over and the nature and volume of activity in each account and test as considered necessary.

j. Reconcile subsidiary records for overdrafts and overdraft protection lending accounts to the general ledger and test all significant reconciling items. Make sure that these are included in either the loan or deposit confirmation samples as appropriate. Trace subsequent disposition of selected overdrafts. List in the report all overdrafts and cash items as of examination date, regardless of amount, to employees, officers, and directors, including their related business interests.

k. If any portion of deposit account balances are temporarily invested in a third party's investment accounts, perform the following.

i. Reconcile subsidiary records for the invested deposits to the general ledger account and test significant reconciling items.

ii. Confirm the investment(s) with the third party through a positive verification.

iii. Review procedures for receipt and payment of income and for opening and closing of investment relationships.

iv. Review and test for compliance with the investment agreement.

2. Mail confirmation requests to a selected number of deposit customers whose accounts have been closed since last examination.

3. Official Checks

a. Balance all categories and reconcile totals to the general ledger accounts.

b. For at least two days subsequent to examination date, prove the total of all checks paid by day. Review selected paid checks for authored signatures and endorsements and for any unusual payees. Trace to the listing of official checks outstanding as of examination date to test for timely recording.

c. Review procedures for control of unissued checks and test for compliance.

d. Obtain a list of all outstanding official checks payable to the bank. Review the nature and propriety of the checks as considered necessary.

e. Review procedures for classification of dormant official checks; method of control over the checks; and test for compliance.

4. Other Liabilities

a. Review and test the accounting procedures for recording income taxes and determine the reasonableness of the balances by:

i. determining that the prior fiscal year's income tax liabilities were properly recorded;

ii. reviewing the calculation and propriety of deferred income taxes as of the prior fiscal year-end and comparing it to the recorded amount;

iii. recalculating the current fiscal year's provision for income taxes (through the prior month end) and comparing to the recorded amount.

b. Confirm all federal funds purchased by positive verification.

c. Reconcile subsidiary records for other borrowings (including items such as securities sold under agreement to repurchase, notes and mortgages payable, and capitalized leases) to the general ledger account and test significant reconciling items. Confirm each borrowing by positive verification. Test related interest accrual and expense accounts as considered necessary.

d. Reconcile subsidiary records for accrued expenses and deferred revenue accounts to the general ledger accounts. Determine the reasonableness of the balances by reviewing the accrual rate, recalculating the balance and comparing the recalculation to the bank's recorded accrued expense and deferred revenue accounts on a test basis.

e. Review and test any other liability accounts as to reasonableness and consistency. Confirm and trace to supporting documentation as considered appropriate.

C. Capital Accounts

1. Capital Stock. Reconcile subsidiary records for capital stock to general ledger account. If applicable, request a listing from transfer agent/registrar and reconcile to general ledger. Ascertain that there is adequate control of unissued certificates.

2. Capital Notes and Debentures

a. Reconcile subsidiary records to the general ledger.

b. Review all entries for compliance with terms of the agreement.

c. Test interest paid and interest accrued as applicable. Check sinking fund payments, if any, for compliance with terms of the agreement.

d. Confirm balances with holders on a test basis.

3. Surplus. Review all entries since last examination for proper authorization by the board of directors.

4. Undivided Profits

a. Review the prior year-end closing entries for propriety on a test basis.

b. Review all interim entries for proper authorization and accuracy.

c. Recompute the last dividend paid and agree to authorization in the board of directors minutes.

D. Other Income and Expense

1. Review other income and expense accounts not tested in connection with balance sheet accounts by comparison with prior periods and investigate unusual fluctuations.

2. Review salary and benefit expenses for comparability with prior periods and overall reasonableness, considering the number of employees and various pay classifications.

E. Other Customer Services

1. Collection Items

a. Schedule selected outstanding items at the examination date; inspect items or confirm with holders.

b. Examine credit or remittance advices, checks, or other evidence of payment applicable to scheduled items paid subsequent to examination date.

2. Safekeeping Department

a. Review accounting procedures for recording items held in safekeeping for customers.

b. Inspect selected items on hand and confirm items held in custody by other banks.

c. Mail negative confirmation requests on a sample of the customer safekeeping accounts.

3. Loan Collateral

a. Inspect selected items on hand and confirm items held in custody by other banks.

b. Mail negative confirmation requests on a sample of the loan collateral accounts.

c. Compare loan collateral with collateral receipts outstanding on a test basis.

d. Review the bank's procedures for receipt, custody, substitution, and release of that collateral.

4. Consignment Items. Determine the adequacy of inventory records and control procedures over the unissued reserve supply of travelers checks, United States Savings Bonds, and other consignment items. If no quarterly internal surprise counts are performed or if they are not adequate, count all consignment items and confirm with the issuer(s).

F. Trust Department

1. Reconcile subsidiary records for trust investments and trust cash to the control accounts and general ledger accounts, respectively. Review the procedures to determine if entries are recorded accurately and on a timely basis.

2. Count trust assets or confirm with safekeeping agent on a test basis.

3. Review policies and procedures for identifying overdrafts and uninvested cash balances.

4. Review selected trust accounts and test transactions to supporting records and data.

La. Admin. Code tit. 10, § III-705

Promulgated by the Department of Economic Development, Office of Financial Institutions, LR 16:20 (January 1990).

AUTHORITY NOTE: Promulgated in accordance with R.S. 6:290.