TABLE OF CONTENTS 

Chapter 1 -- 

INTRODUCTION 

1.01 Why update this Guide? 

1.02 What approach have you taken in revising the 

Guide? 

1.03 Who will benefit most from this Guide? 

1.04 Does this Guide apply to FISCUs? 

1.05 Is this Guide directed to the credit union having a 

manual or automated system? 

1.06 Is this Guide all we need? 

Chapter 2 -- 

WHAT IS A 

SUPERVISORY 

COMMITTEE? 

2.01 What is a supervisory committee? 

2.02 How is the supervisory committee appointed? 

2.03 What are the qualifications to be appointed to the 

committee? 

2.04 What actions may the supervisory committee 

take with other board and committee members? 

2.05 Who is required to maintain records of all actions 

taken by the supervisory committee? 

2.06 Is credit union information confidential? 

Chapter 3 -- 

WHAT STANDARDS 

MUST WE MEET IN 

PERFORMING THE 

AUDIT AND 

VERIFICATION?

3.01 What standards must we meet in performing the 

audit and verification? 

3.02 How qualified do we have to be? 

3.03 How accurate must we be? 

3.04 How do we control the work? 

3.05 How much detail must we go into? 

3.06 What files must we make and keep? 

3.07 What is “independence” and must we be 

independent? 

3.08 What happens if we fall short of these standards?
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Chapter 4 -- 

WHAT ARE OUR 

RESPONSIBILITIES? 

4.01 What are our goals and responsibilities? 

4.02 What, then, must we do? 

4.03 What should we know about the annual audit? 

4.04 What should we know about the verification of 

member’s accounts? 

4.05 How do we ensure that the board of directors is 

safeguarding assets, and that management 

complies with its policies and plans? 

4.06 What are internal controls and how do we review

them? 

4.07 How do we manage and structure an internal 

audit function? 

4.08 How do we manage and structure an external 

audit function? 

4.09 What should we consider when looking at 

internal versus external auditing? 

4.10 How do we follow-up on examinations and 

audits? 

4.11 What should we expect when meeting with the 

federal examiner? 

4.12 How do we handle member complaints? 

4.13 What other procedures should we consider? 

4.14 Are there any other resources we can use? 

4.15 What records can we access? 

4.16 What do we need to document? 

4.17 What if we find problems? 

4.18 How do we coordinate our plans into a program? 

Appendix

Sample Supervisory Committee Workplan

Chapter 5-- 

WHO MUST DO THE 

AUDIT? 

5.01 Who may do an audit or verification? 

5.02 What types of audit services satisfy the annual 

supervisory committee audit requirement? 

5.03 What must an audit involve? 

5.04 Who hires the auditor? 

5.05 What is the purpose of an engagement letter? 

5.06 Who signs the engagement letter? 

TOC - 2 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

5.07 What is required in the engagement letter? 

5.08 What should be included in an engagement letter 

of a supervisory committee audit which does not 

address all of the required procedures? 

5.09 Who receives the written report from the 

compensated auditor? 

5.10 Who is responsible to ensure that the 

independent, compensated auditor and the 

auditor’s reports comply with the terms of the 

engagement letter? 

5.11 Who prepares the audit report if the supervisory

committee or uncompensated representative 

completes the audit? 

5.12 Who has access to the written supervisory

committee audit report? 

5.13 Who is responsible for reviewing compliance 

with the Bank Secrecy Act? 

Appendix

5A Sample engagement letter. 

Chapter 6 -- 

SHOULD WE HAVE 

AN INTERNAL AUDIT 

FUNCTION? 

6.01 Who should have an internal auditor? 

6.02 How can an internal audit function assist us? 

6.03 What are our responsibilities with regard to the 

internal audit function? 

6.04 What are the board of directors’ responsibilities? 

6.05 How do we go about hiring an internal auditor? 

6.06 What qualifications should our internal auditor 

have? 

6.07 What is the audit plan and what should it 

include? 

6.08 What reports should the internal auditor prepare 

for us and to whom should we deliver them? 

TOC - 3 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Chapter 7 -- 

WHAT STEPS MUST 

WE TAKE TO 

COMPLETE THE 

AUDIT OURSELVES?

7.01 What is involved in doing the audit ourselves? 

7.02 Why are sound internal controls important? 

7.03 How do we learn about the credit union’s internal 

control structure? 

7.04 Could you discuss further the three elements of 

an internal control structure? 

7.05 What is involved in planning the audit? 

7.06 What is materiality?

7.07 What should be our focus when reviewing 

internal controls? 

7.08 What audit testing is necessary and most 

effective? 

7.09 What should be the focus of our testing? 

7.10 What additional audit tests may be necessary?

 7.11 For cash? 

 7.12 For investments? 

 7.13 For loans? 

 7.14 For shares? 

7.15 How do we review related party transactions? 

7.16 What reports should we review as part of the 

audit if the credit union has an EDP system? 

7.17 What are the considerations in audit planning for 

manual credit unions? 

7.18 What are some of the main audit concerns with 

manual credit unions? 

7.19 What other issues must we review in the audit 

stage? 

TOC - 4 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Chapter 8 -- 

HOW DO WE AUDIT 

CASH? 

8.01 What general ledger accounts are part of the 

cash area? 

8.02 What off balance sheet cash items need to be 

audited? 

8.03 What are the general objectives in auditing cash? 

8.04 How do we learn about internal controls over 

cash? 

8.05 How do we audit cash in the bank? 

8.06 How do we audit the change fund? 

8.07 How do we audit petty cash? 

8.08 How do we audit wire transfers? 

8.09 How do we audit travelers checks? 

8.10 How do we audit money orders? 

Appendices

8A Internal Control Checklists. 

8B Cash-in-bank Account Reconcilement Form. 

8C Receipts To Deposit Test Form. 

8D Sample Confirmation Letter For Cash-in-bank 

Accounts. 

8E Cash Count Sheet. 

8F Change Fund Recap Form. 

8G Travelers Check Inventory Form. 

8H Sample Confirmation Letter For Travelers 

Checks. 

Chapter 9 -

HOW DO WE AUDIT 

INVESTMENTS? 

9.01 To help us get started, could you provide us 

some background on investment assets? 

9.02 What are our audit objectives? 

9.03 What are our audit procedures? 

9.04 How do we test internal controls? 

9.05 How does management classify investments? 

9.06 How do we verify the accuracy of the general 

ledger accounts? 

9.07 How do we verify investment accounts with 

supporting records? 

9.08 How do we verify the balances listed on the 

investment report? 

TOC - 5 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

9.09 How do we review the premium or discount? 

9.10 How do we determine whether accrued income is 

reasonable? 

9.11 How do we confirm the ownership and existence 

of investments? 

9.12 How do we verify the accuracy of the investment 

fair value section on the financial statements? 

9.13 How do we verify the accuracy of the investment 

maturity breakdown on the financial statement? 

9.14 What do we need to document? 

9.15 What if we determine through testing that internal 

controls are not working as intended? 

Appendices

9A Internal Control Checklist: Investments 

9B Investment Control Worksheet Instructions 

Investment Control Worksheet 

9C Standard Investment Confirmation 

9D Securities Confirmation 

9E Broker Account Confirmation 

Chapter 10 -- 

HOW DO WE AUDIT 

LOANS?

10.01 What is our audit objective? 

10.02 How do we learn about the credit union’s system 

of internal controls over the lending activity?

10.03 What are some additional considerations in 

reviewing internal controls over the lending 

function? 

10.04 What audit procedures must we perform? 

10.05 How do we audit record keeping? 

10.06 How do we review loan policies? 

10.07 How do we determine our loan sample? 

10.08 How do we document our review? 

10.09 Are the loan terms within policy and/or 

regulations? 

10.10 Is the loan properly documented? 

10.11 Is the borrower willing to repay the loan? 

TOC - 6 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

10.12 Is the borrower able to make the loan payments?

10.13 Could you discuss with us the sample 

workpapers appended to this chapter? 

Appendices

10-A Loans Internal Control Checklist

10-B Trial Balance of Members’ Loans Workpaper 

10-C Loan Review Workpaper

Chapter 11 -- 

HOW DO WE 

REVIEW THE 

“ALLOWANCE FOR 

LOAN LOSSES”?

11.01 What is the Allowance for Loan and Lease 

Losses? 

11.02 Who is responsible for the ALLL? 

11.03 In our role of validating the methodology, would 

you clarify what you mean by “methodology”? 

11.04 What are these “common elements” an ALLL 

methodology should have? 

11.05 In our role of overseeing and monitoring internal 

controls over the ALLL process, what should we

focus on? 

11.06 What sorts of ALLL policies and procedures 

should we expect to find? 

11.07 Could you elaborate on the rules that govern 

establishing an ALLL? 

11.08 Could you expand on the requirements in relation 

to the ALLL under FAS 114? 

11.09 Could you expand on the requirements in relation 

to the ALLL under FAS 5? 

11.10 What documentation standards should the credit 

union meet? 

11.11 Could you be more specific concerning the 

documentation of ALLL methodology in written 

policies and procedures? 

11.12 Is there a lesser documentation burden for small 

credit unions? 

11.13 Could you provide some guidance on the 

process of consolidating the loss estimates? 

11.14 What should we focus on in validating the ALLL 

methodology? 

TOC - 7 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

11.15 What documentation do we need to support the 

validation process? 

Appendices

11-A ALLL Questions and Answers 

11-B Allowance for Loan Losses Workpaper 

11-C Allowance for Loan Losses Checklist

Chapter 12 -- 

HOW DO WE AUDIT 

FIXED ASSETS? 

12.01 What general ledger accounts are part of the 

fixed asset area? 

12.02 What is the limit for fixed assets for a Federal 

Credit Union? 

12.03 Why are internal controls over fixed assets 

important? 

12.04 How does the supervisory committee review the 

internal controls over fixed assets? 

12.05 What are the audit objectives for fixed assets? 

12.06 What are the audit procedures for fixed assets? 

12.07 How do we review depreciation expense? 

Appendices

12-A Internal Control Checklist: Fixed Assets. 

12-B Sample Workpaper For Fixed Assets.

Chapter 13 -- 

HOW DO WE AUDIT 

“OTHER ASSETS”? 

13.01 What general ledger accounts are part of the 

“Other Assets” account group? 

13.02 How do we review the internal controls over 

“Other Assets”? 

13.03 What are the audit objectives for “Other 

Assets”? 

13.04 What are the audit procedures for “Other 

Assets”? 

Appendices

13-A Internal control checklist: Other Assets.

13-B Sample confirmation letter for other asset 

accounts.

13-C Sample work paper -- Other Asset accounts 

audited.

TOC - 8 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Chapter 14 -- 

HOW DO WE AUDIT 

“OTHER 

LIABILITIES”? 

14.01 What general ledger accounts are included in 

the “Other Liabilities” category?

14.02 How do we review the internal controls over 

“Other Liabilities”? 

14.03 What are “Contingent Liabilities”? 

14.04 What are suspense accounts? 

14.05 What are the audit objectives for “Other 

Liabilities”? 

14.06 What are the audit procedures for “Other 

Liabilities”? 

Appendices

14-A Internal control checklist: “Other Liabilities”. 

14-B Sample attorney letter confirmation. 

14-C Sample work paper - Summary of accounts 

audited.. 

CHAPTER 15 -- 

HOW DO WE AUDIT 

“BORROWED 

FUNDS”? 

15.01 To help us get started, could you give us some 

background on “Borrowed Funds”? 

15.02 What are our audit objectives? 

15.03 What are our audit procedures? 

15.04 How do we evaluate and test internal controls? 

15.05 How do we verify interest on “Borrowed 

Funds”? 

Appendices

15-A Internal Control Checklist: Borrowed Funds. 

15-B Borrowed Funds Confirmation Sample. 

Chapter 16 - 

HOW DO WE AUDIT 

“SHARES”? 

16.01 What is our audit objective? 

16.02 What do we look for in reviewing policies and 

procedures? 

16.03 What audit procedures must we perform to test 

these internal controls? 

16.04 How do we audit the record keeping? 

16.05 Could you discuss with us the sample 

workpapers appended to this chapter? 

TOC - 9 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Appendices

16-A Internal Control Checklist: Shares.

16-B Trial Balance of Members Shares Workpaper.

Chapter 17 -- 

HOW DO WE AUDIT 

EQUITY? 

17.01 What is equity? 

17.02 What are the different types of equity

accounts? 

17.03 What are our audit objectives? 

17.04 What are our audit procedures? 

17.05 How do we test the internal control structure?

17.06 How do we determine that transactions are 

properly authorized? 

17.07 How do we determine that entries are properly

classified? 

17.08 How do we determine that entries are recorded 

in the appropriate amounts and at the right 

time? 

17.09 What are the regulation requirements for the 

Regular Reserve Account? 

17.10 How do we determine if Regular Reserve 

Transfer amounts comply with the regulation? 

17.11 How do we verify transfers if management’s 

worksheet is not the same as the one in the 

appendix? 

17.12 How do we verify transfers if staff has not 

developed their own worksheet? 

17.13 What if management did not transfer the 

correct amount? 

17.14 How do we verify other entries to the Regular 

Reserve account? 

17.15 What if capital is negative (a debit balance)? 

17.16 Are there other references that we can use for 

additional clarification of equity account 

requirements? 

Appendices

17-A Internal Control Checklist: Equity.

17-B Regular Reserve Transfers Worksheet. 

TOC - 10 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Chapter 18 -- 

HOW DO WE AUDIT 

INCOME? 

18.01 What is our audit objective? 

18.02 What accounting issues will we need to 

address? 

18.03 What audit procedure do we use to determine if 

income is properly recorded? 

18.04 What do we look for in reviewing policies and 

procedures? 

18.05 Could you discuss with us the Gross Test 

Workpaper appended to this chapter? 

Appendix

18-A Gross Test of Interest on Loans Workpaper 

Chapter 19 -- 

HOW DO WE AUDIT 

EXPENSES? 

19.01 What general ledger accounts are included in 

the operating expense area? 

19.02 What is the general audit strategy for operating 

expenses? 

19.03 How do you increase testing of operating 

expenses? 

19.04 How do you review internal controls over 

operating expenses? 

19.05 What are the general audit objectives for 

operating expenses? 

19.06 What are the general audit procedures for 

operating expenses? 

19.07 How do you complete an analytical review of 

operating expenses? 

19.08 What are the audit objectives for Employee 

Compensation and Benefits Expense? 

19.09 What are the audit procedures for Employee 

Compensation and Benefits Expense?

19.10 What are the audit objectives for Dividend 

Expenses? 

19.11 What are the audit procedures for Dividend 

Expenses? 

19.12 What are the audit procedures for Employee 

Travel and Conference Expense? 

TOC - 11 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

19.13 What are the audit procedures for Cash Over 

and Short? 

19.14 What are the audit procedures for the corporate 

credit card account? 

19.15 What are the audit procedures for other 

operating expense categories? 

Appendices

19-A Internal Control Checklist: Expenses. 

19-B Operating Expenses Worksheet. 

Chapter 20 -- 

HOW DO WE AUDIT 

“RELATED PARTY 

TRANSACTIONS”?

20.01 What are “related party transactions”? 

20.02 How do you identify the “related party” accounts 

for the audit? 

20.03 What are the audit objectives for “related party

transactions”? 

20.04 What are the audit procedures for “related party

transactions”? 

20.05 How do you audit loans to employees and 

officials? 

20.06 How do you audit share accounts for employees 

and officials? 

20.07 What are some examples of “reportable 

conditions”? 

Appendices

20-A Internal control checklist: Related Party 

Transactions. 

20-B Sample workpaper -- Schedule of employee and 

official loan and share accounts audited. 

Chapter 21 -- 

HOW DO YOU 

REVIEW AN EDP 

SYSTEM?

21.01 Why is it important to review the EDP system? 

21.02 What should be our objectives in evaluating the 

EDP system? 

21.03 What is a system survey and what do we need 

to know about the process of conducting a 

system survey? 

TOC - 12 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

21.04 What are management controls and how do you 

assess them? 

21.05 Could you discuss organizational management 

controls? 

21.06 What management controls should we look for 

relevant to planning for growth? 

21.07 What management controls should we look for 

governing contracted services? 

21.08 What management controls should we look for 

governing disaster recovery?

21.09 Could you give us an overview of general 

controls? 

21.10 What general controls should we look for 

governing system security?

21.11 What do you need to know about general 

controls related to backup procedures? 

21.12 What do you need to know about general 

controls related to computer operations? 

21.13 What do you need to know about application 

controls? 

21.14 What do you need to know about application 

controls related to programming standards? 

21.15 What do you need to know about application 

controls related to program changes? 

21.16 What do you need to know about data 

processing application controls? 

Appendix

21-A EDP System Survey Worksheet 

Chapter 22 -- 

WHAT OTHER 

AUDIT 

CONSIDERATIONS 

DO WE NEED TO 

ADDRESS?

22.01 Do we need to review for compliance with 

regulations? 

22.02 Who controls regulations, and monitors for 

compliance? 

22.03 How do we review for regulation compliance? 

22.04 What are the primary regulations affecting 

credit unions we need to know about? 

22.05 Are there any repercussions from lack of 

compliance? 

TOC - 13 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

22.06 What resources are available to learn more 

about regulations? 

22.07 What types of security devices should the 

credit union have? 

22.08 Are we responsible for detecting fraud? 

22.09 What signs of fraud should we look for? 

22.10 What should I do if I suspect fraud? 

Appendix

22-A Enforcement Responsibility For Laws Affecting 

Credit Unions. 

Chapter 23 -- 

HOW DO WE 

REPORT RESULTS? 

23.01 What are the reporting requirements of Part 715 

of the NCUA Rules and Regulations? 

23.02 What should the audit findings include? 

23.03 How can we identify reportable conditions for 

internal controls? 

23.04 What are some examples of reportable 

conditions? 

23.05 What must we do with the report, if anything? 

23.06 What is our duty after submitting the audit 

report? 

23.07 When is it necessary to complete and report 

audit procedures in addition to the required 

annual audit? 

23.08 What audit procedures should we perform in a 

supplemental audit? 

23.09 Who should we notify if a fraud or illegal act 

occurs? 

TOC - 14 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

Chapter 24 -- 

WHAT MUST A 

VERIFICATION 

INVOLVE? 

4.01 What is an “Account Verification”? 

24.02 Why must we verify accounts? 

24.03 How do we send the verification to the 

members? 

24.04 When do we complete the verification? 

24.05 Which accounts do we verify?

24.06 What controls do we need to implement for the 

verification? 

24.07 How do we get started? 

24.08 What is the difference between a positive and 

negative confirmation? 

24.09 How do we complete the verification? 

24.10 What additional steps do we need to take for a 

positive verification? 

24.11 What is a sample? 

24.12 What requirements do we need to meet when 

obtaining a sample? 

24.13 How accurate would a sample be? 

24.14 How do we determine the method of selection? 

24.15 How do we select a sampling plan? 

24.16 How do we determine precision, confidence 

level, and occurrence rate? 

24.17 How do we select a sample? 

24.18 What do we do with the statements returned as 

“undeliverable," or “moved”? 

24.19 What action is appropriate if we receive a notice 

of an incorrect balance? 

24.20 How do we verify closed accounts? 

Appendices

24-A Notice 

24-B Positive Verification Letter 

24-C Negative Verification Letter 

24-D Negative Verification Statement 

24-E Tables for Use in Statistical Sampling 

24-F Closed Account Verification Letter 

TOC - 15 
Supervisory Committee Guide, Change 1 

TABLE OF CONTENTS 

 (continued) 

TOC - 16 

Chapter 25 -- 

Final Audit Checklist 

Glossary -- 

APPENDIX A Minimum Procedures (Pending -- AICPA and NCUA 

Working Together to Finalize) 

APPENDIX B Suggested Workpaper Forms with Blank Data Fields 
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the NCUA Rules and Regulations §715. 

Chapter 1 -- INTRODUCTION

1.01 Why update this Guide ?

1.02 What approach have you taken in revising the Guide ?

1.03 Who will benefit most from this Guide ?

1.04 Does this Guide apply to FISCUs?

1.05 Is this Guide directed to the credit union having a manual or automated

system?

1.06 Is this Guide all we need?

Why update this

Guide?

1.01 This Guide updates our previous publication dated May

1997. It incorporates changes in the Federal Credit Union Act

required by the Credit Union Membership Access Act of 1998 and

amendments to the related regulations governing credit union

supervisory committee audits and verifications amended by the

NCUA Board on [date]. It conveys information and provides

clarifications to credit union officials and management, although it

doesn’t have the force and effect of a regulation.

What approach

have you taken in

revising the

Guide?

1.02 The Guide is useful to credit unions with a non-complex

structure, and usually a smaller asset size. It is a burden for them

to obtain the services of a compensated qualified auditor to assist

them in conducting the annual supervisory committee audit. It will

be most helpful to the volunteer in a credit union operating in an

elementary data processing environment. We have used a “plain

English” question and answer format throughout this Guide.

Survey Results. A survey conducted previously indicated that:

• For guidance in meeting the audit and verification

requirements, you most rely on your external auditor, the

Supervisory Committee Guide, and the NCUA examiner, in

that order.
Supervisory Committee Guide

Introduction

Chapter 1

1-2

• You felt the need for such a Guide continues to exist, in its

present form but supplemented by an electronic format, and

issued by the federal regulator.

• You felt the targeted audience should continue to be credit

union volunteers, primarily untrained volunteers.

• You were split on whether the Guide should be a general

reference tool directing users to others sources or a standalone document.

• You felt that existing professional guidance (FASB, AICPA,

etc.) was too technical, of little direct usefulness and in

need of supplement.

• You wished to retain the freedom to develop your own audit

program and choose your own reporting format within

parameters.

• Topics you recommended for addition and expansion in the

revised Guide include: auditing in a computer environment;

internal controls and security measures; comprehensive

program of internal auditing; updated forms and checklists;

fraud and risk assessment guidelines; materiality guidelines;

discussion of legal liability; etc.

Who will benefit

most from this

Guide ?

1.03 Supervisory committee members, like yourselves,

especially those new to their positions, can use this Guide to get a

sound overall introduction to their duties. Better informed and

guided committee members will help ensure the credit union

operates safely and soundly. A safe and sound credit union can

provide the best possible service to its members.

Boards of directors can be assured the supervisory committee

audits are thorough. Identification of a problem is the crucial first

step to correcting the problem.

Professional auditors can gain additional understanding of
Supervisory Committee Guide

Introduction

Chapter 1

1-3

what NCUA contemplates as necessary and appropriate, which

can enhance their audit planning and scope-setting process.

Regulators and insurers can achieve a higher confidence level in

the accuracy of the financial data regularly reported for their

review and/or monitoring.

Does this Guide

apply to FISCUs?

1.04 This Guide is written for Federal credit unions. Certain

parts of the Guide briefly mention federally insured state chartered

credit unions (FISCUs) but the Guide does not include a full

discussion of FISCU matters. Nonetheless, FISCUs may find it a

handy reference tool if supplemented with guidance available

through your state supervisory authority.

Is this Guide

directed to the

credit union

having a manual

or automated

system?

1.05 We have directed the Guide to the credit union having an

automated system. Almost all credit unions have at least their

share and loan accounts on computers. To automate the rest of

the bookkeeping beyond this point takes very little extra effort.

Statistics. As of June 30, 1998, only 4.0 percent (447) of

federally insured credit unions reported they were still on manual

recordkeeping systems. Of these (402) are less than $2 million

asset size. Many of these credit unions will become automated

over the next few years as commercial software for full

bookkeeping becomes even more refined and “user friendly,” and

the costs continue to decline.

If your credit union isn’t already automated, you should be sure to

review Chapter 7 for guidance on some key issues in hand-posted

recordkeeping. We’ve also added some comments about auditing

when not automated in some of the chapters and at the end of the

instructions for many of the sample workpapers.
Supervisory Committee Guide

Introduction

Chapter 1

1-4

Is this Guide all

we need?

1.06 The following Guide does not attempt to address every

possible situation that you may encounter, and we do not contend

that many of the procedures described are the only ones you can

use. Procedures appropriate for your credit union may vary widely

from those of another credit union. Therefore, you must plan and

carry out your duties in a manner consistent with and responsive

to your particular situation and needs.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the NCUA Rules and Regulations §715.

Chapter 2 -- WHAT IS A SUPERVISORY COMMITTEE?

2.01 What is a supervisory committee?

2.02 How is the supervisory committee appointed?

2.03 What are the qualifications to be appointed to the committee?

2.04 What actions may the supervisory committee take with other board and

committee members?

2.05 Who is required to maintain records of all actions taken by the

supervisory committee?

2.06 Is credit union information confidential?

What is a

supervisory

committee?

2.01 Part 715 of the NCUA Rules and Regulation defines a

supervisory committee consistent with Section 111(b) of the

Federal Credit Union Act, 12 U.S.C. 1786(r):

“The supervisory committee shall be appointed by the

board of directors and shall consist of not less than three

members nor more than five members, one of whom

may be a director other than the compensated officer of

the board . . .”

For some federally-insured, state chartered credit unions

(FISCUs), the “audit committee” designated by state statute or

regulation is the equivalent of a supervisory committee. This

Guide is for use by all federally insured credit unions but state

chartered credit unions must look to state law to identify

certain specific differences. §741 of the NCUA Rules and

Regulations applies to FISCUs.
Supervisory Committee Guide

WHAT IS A SUPERVISORY COMMITTEE?

Chapter 2

2-2

How is the supervisory committee

appointed?

2.02 The board of directors appoints the supervisory

committee, determining the number of committee members

and the term of service.

Number of committee members. The board of directors

determines the number of members on the committee. The

minimum number of members on the committee is three; the

maximum is five.

Term of service. The board of directors determines the term.

• The terms are for one, two, or three years.

• All terms must be for the same number of years in total.

• Terms should be staggered with one position up for

appointment each year thus providing continuity to the

committee.

• The regular terms expire after the first regular board

meeting following the annual meeting.

One member of the supervisory committee may be a director

other than a compensated officer.

Committee leadership. The committee members select a

chairperson and a secretary. The offices of chairperson and

secretary may be held by the same person.

What are the

qualifications to be

appointed to the

committee?

2.03 You, a supervisory committee appointee/member:

• Must be a member of the credit union.

• Must be bondable by the credit union’s surety bond

company (all credit union officials and employees must
Supervisory Committee Guide

WHAT IS A SUPERVISORY COMMITTEE?

Chapter 2

2-3

be bondable).

Employees and credit committee members are not eligible for

membership on the committee as outlined in the FCU Bylaws.

Experience in bookkeeping, accounting, or auditing is helpful

in carrying out your responsibilities for the audit and

verification.

The following individuals are prohibited from supervisory

committee service by principles of sound internal control:

• Loan officer.

• Membership officer.

• Treasurer/Assistant treasurer.

• President/Vice president.

• Secretary.

What actions may

the supervisory

committee take with

other board and

committee

members?

2.04 You may suspend, by unanimous vote, any board

member, executive officer, or credit committee member. (See

below). Suspension is a serious measure and must be

thoroughly considered before action is taken.

• If you suspend someone, you will call a special meeting

of the members to act on the suspension.

• The special meeting must be held within seven to

fourteen days after the suspension.

• The person being suspended must be given an

opportunity to present a defense and be given due

process.

You may call a special meeting (by a majority vote) to consider

any violation of the:

• FCU Act.

• Rules and Regulations.

• Charter.
Supervisory Committee Guide

WHAT IS A SUPERVISORY COMMITTEE?

Chapter 2

2-4

• Bylaws.

• Any practice considered unsafe or unauthorized.

Attendance at Board meetings. Oftentimes supervisory

committee members have asked NCUA if they are

required/entitled to attend Board meetings. We encourage at

least one supervisory committee representative to attend each

board meeting. While the supervisory committee may attend

such meetings, attendance is permitted only with the

permission of the board; the committee members do not have

an unqualified right to be present. 

The board must publish minutes and the minutes must be

available to the supervisory committee for its (or its designee)

review.

Who is required to

maintain records of

all actions taken by

the supervisory

committee?

2.05 The secretary must maintain records of all actions

taken.

• Monthly or quarterly meeting minutes should be

completed, based on the complexity and financial

condition of the credit union.

• The minutes should document significant discussions

and summarize procedures performed.

Minutes should be approved by the committee at the next

scheduled meeting.

Is credit union

information

confidential?

2.06 Yes, you must keep any information obtained about the

credit union and member account records confidential.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union

operating in an elementary data processing environment. Compensated auditors should

look to the requirements of the Federal Credit Union Act and the NCUA Rules and

Regulations §715.

Chapter 3 -- WHAT STANDARDS MUST WE MEET IN

PERFORMING THE AUDIT AND VERIFICATION?

3.01 What standards must we meet in performing the audit and

verification?

3.02 How qualified do we have to be?

3.03 How accurate must we be?

3.04 How do we control the work?

3.05 How much detail must we go into?

3.06 What files must we make and keep?

3.07 What is “independence” and must we be independent?

3.08 What happens if we fall short of these standards?

What standards

must we meet in

performing the

audit and

verification?

3.01 §715 of the NCUA Rules and Regulations sets forth

supervisory committee audit requirements and standards

consistent with the Credit Union Membership Access Act

(CUMAA). The requirements and standards are linked to asset

size and type of audit1

:

• Federally insured credit unions with assets of $500 million or

greater must obtain a financial statement audit consistent

with generally accepted auditing standards (GAAS) by an

independent certified public accountant or public accountant

licensed by the appropriate State or jurisdiction to perform

those services.

• Federal credit unions with assets less than $500 million but

more than $10 million may obtain a financial statement audit

(as above); a balance sheet audit; a report on the

examination of internal control over call reporting under

attestation standards; or an audit consistent with this Guide.

• Federally insured credit unions with less than $10 million in

 

1

 Any federal credit union regardless of asset size can fulfill its supervisory committee audit responsibility

by obtaining a financial statement audit.
Supervisory Committee Guide

WHAT STANDARDS MUST WE MEET IN PERFORMING THE AUDIT AND VERIFICATION?

Chapter 3

3-2

assets may obtain a balance sheet audit; a report on the

examination of internal control over call reporting under

attestation standards; or an audit consistent with this

Guide.

In addition, §715 requires that any compensated auditor you hire

be independent.

“Federal credit union compensated auditors performing

audits for supervisory committees, must be independent of

the credit union’s employees, members of the board of

directors, supervisory and credit committees and/or the

credit union’s loan officers, and members of their immediate

families.”

How qualified do

we have to be?

3.02 Your appointment by the board reflects the board’s

confidence in your integrity and in your ability to assume this

position of responsibility in safeguarding the credit union’s assets

and protecting the interests of the members. The board will have

selected members who have the best backgrounds available and

who are interested in the credit union as well as the functions of

the committee. You can acquire the special knowledge and skills

to do a credible job if you have a genuine interest in acquiring

them. It is up to you to achieve a satisfactory level of proficiency

in carrying out your responsibilities. You can accomplish this by

reading, observing and actually performing the audit steps.

To be a committee member, you should have accounting

knowledge. For example, you probably don’t need an accounting

degree to audit a credit union of small asset size offering core

services only, but you almost always would need prior experience

with double-entry bookkeeping.

Also you need to have an understanding of auditing procedures.

You must understand internal controls, be able to test controls,

complete the annual audit, and verify members’ accounts to

insure that proper procedures are followed in the gathering of data

and
Supervisory Committee Guide

WHAT STANDARDS MUST WE MEET IN PERFORMING THE AUDIT AND VERIFICATION?

Chapter 3

3-3

evaluating results. If experience and understanding are lacking,

you and the committee should seek sufficient training or the

assistance of an outside professional who can perform the

function in a competent manner.

References and Resources Available. In addition to this Guide,

you should consult a number of references and resources:

(a) FEDERAL CREDIT UNION ACT, BYLAWS, RULES AND REGULATIONS

AND CHARTER. - The Act and Bylaws state the purposes and

functions of federal credit unions and define the

responsibilities of the officers, directors, and committees. The

Rules and Regulations further outline the conditions under

which the functions permitted by the Act may be carried out.

Another document, the credit union’s charter, sets forth the

field of membership thereby identifying who is eligible to

become members of the credit union. You must have an

understanding of these references in order to effectively

perform your responsibilities.

(b) ACCOUNTING MANUAL FOR FEDERAL CREDIT UNIONS. - Basic

accounting procedures recommended for credit unions under

$10 million in assets by the National Credit Union

Administration are set forth in this publication.

(c) CONFERENCES WITH THE FEDERAL CREDIT UNION EXAMINER. -

The examiners should always be considered an available

resource to help you. During federal supervisory

examinations, the examiner analyzes the supervisory

committee’s performance and will arrange a conference with

one or more members of the supervisory committee as part of

that analysis process. At these conferences the examiner

may offer helpful suggestions to you concerning the

committee’s work.

d) GENERAL OBSERVATION OF OPERATIONS. - You can learn a great

deal about your credit union by observing its day-to-day

operations and by attending meetings of the board of directors

and credit committee.
Supervisory Committee Guide

WHAT STANDARDS MUST WE MEET IN PERFORMING THE AUDIT AND VERIFICATION?

Chapter 3

3-4

e) ATTENDANCE AT TRADE ASSOCIATION MEETINGS. - Experience

has shown that credit union officials can broaden their

perspective, improve their competence, and get more

satisfaction from credit union work by taking an active part in

trade association functions.

(f) PARTICIPATION IN TRAINING CLASSES. - Trade associations

conduct educational classes for supervisory committee

members from time to time. These educational classes have

the flexibility to be of help to both experienced and new

committee members. In most areas, classes for supervisory

committee members can be arranged if there is sufficient

interest and participation.

(g) TRAINING FROM SOURCES OUTSIDE CREDIT UNIONS. - You may

wish to go beyond the scope of training materials specifically

designed for credit unions. Some committee members enroll

in evening classes in accounting and auditing and others may

subscribe to correspondence courses in this field.

How accurate

must we be?

3.03 You must undertake the audit and verification with good

faith and integrity. A reasonable number of “human errors” is

acceptable, but shouldn’t occur often enough to affect the overall

results and conclusions you reach.

How do we

control the work?

3.04 Plan your work adequately. Audit planning involves

developing an overall strategy for the conduct and scope of the

audit. Develop more detailed plans to address more complex

issues. Audit planning is discussed more fully in Chapter 7.

Common sense requires that you properly supervise any

assistants you use for tasks such as verifications of members’

accounts or periodic cash counts. This means: 

(a) Directing the efforts of assistants who are involved in accom-
Supervisory Committee Guide

WHAT STANDARDS MUST WE MEET IN PERFORMING THE AUDIT AND VERIFICATION?

Chapter 3

3-5

plishing the objectives of the audit and determining whether

those objectives were accomplished. Elements of supervision

include instructing assistants, keeping informed of significant

problems encountered, reviewing the work performed, and

dealing with differences of opinion among personnel.

(b) Assistants should be informed of their responsibilities and the

objectives of the procedures that they are to perform.

(c) The work performed by each assistant should be reviewed to

determine whether it was adequately performed and to

evaluate whether the results are consistent with the

conclusions presented in your report.

How much detail

must we go into?

3.05 The internal control structure, size, complexity, and

financial stability of your credit union will influence the extent of

your review. You can use the checklists provided later in this

Guide to assess the strength of the credit union’s internal controls,

either as part of an annual audit or according to an annual

schedule of tasks you can develop. We have also provided

sample audit steps and working papers to assist you in planning

your audit.

Licensed compensated auditors retained to perform committee

activities are expected to adhere to generally accepted auditing

standards (GAAS) of the American Institute of Certified Public

Accountants (AICPA).

What files must

we make and

keep?

3.06 Keep all underlying account data and all corroborating

evidence available to you. Evidence includes copies of books of

original entry, the general and subsidiary ledgers, related

accounting manuals, and such informal and memorandum records

as work sheets supporting cost allocations, computations, and

reconciliations. Corroborating evidence includes checks, invoices,

contracts, and minutes of meetings; confirmations and other

written representations; information you obtain from inquiry,

observation,
Supervisory Committee Guide

WHAT STANDARDS MUST WE MEET IN PERFORMING THE AUDIT AND VERIFICATION?

Chapter 3

3-6

inspection, and physical examination; etc.

The committee must maintain or make available to NCUA a

complete set of the original audit working papers in support of the

audit and verification. If you use an independent compensated

auditor, you must ensure NCUA staff has unconditional access to

the working papers for inspection upon request, at either the

offices of the credit union or at a mutually agreeable location.

This requirement should be stipulated in the auditor’s engagement

letter.

Working papers refers to,

 “. . .the principal record, in any form, of the work performed

during the audit to support the findings and conclusions.

The definition of working papers includes the written record

of procedures applied, tests performed, information

obtained, and pertinent conclusions reached during the

audit. Also included in the definition is an independent and

compensated auditor’s proprietary audit program, analysis,

memoranda, letters of confirmation and representation,

abstracts of credit union documents, any retained reviewer’s

notes, and all schedules and commentaries.”

What is

“independence”

and must we be

independent?

3.07 “Independence” and “independent” means exercising,

“ . . the impartiality necessary for the reliability of the

compensated auditor’s findings. Independence requires the

exercise of fairness toward credit union officials, members,

creditors and others who may rely upon the supervisory

committee audit report.”

You, too, must be certain that you remain objective and free from

influences that may impair your objectivity. If you can’t act in an

independent manner, your opinions have less value. If for some

reason you or a member of the committee is, or is perceived to be,

unable to objectively perform a specific duty, it is your

responsibility and the committee’s responsibility as a whole to

determine that the
Supervisory Committee Guide

WHAT STANDARDS MUST WE MEET IN PERFORMING THE AUDIT AND VERIFICATION?

Chapter 3

3-7

task is performed by a committee member who can act

independently. Without independence, the credibility of the data

gathered and/or the conclusions reached are questionable.

What happens if

we fall short of

these standards?

3.08 You’ll typically get a reasonable chance to either make

corrections or improve your future work. Federal examiners or

your state supervisor typically will advise you of the additional

work necessary to comply with §715 and provide you from 30 to

60 days to bring the audit or verification into compliance.

If NCUA or your state supervisor is not satisfied with your work or

should the credit union fail to correct deficiencies within a

reasonable period of time, you may be required to hire outside

assistance (See NCUA Rules and Regulations, §715.)

Inability or unwillingness to fulfill the duties of your office can only

bring harm to the credit union and its members/owners. If this is

the situation you find yourself in, you may wish, in the best

interests of all, to step aside. If you choose not to step aside

under certain circumstances (bad faith, negligence, dishonesty,

etc.) NCUA can impose sanctions against the supervisory

committee members and penalties against the credit union.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the NCUA Rules and Regulations §715.

CHAPTER 4 -- WHAT ARE OUR RESPONSIBILITIES?

4.01 What are our goals and responsibilities?

4.02 What, then, must we do?

4.03 What should we know about the annual audit?

4.04 What should we know about the verification of member’s accounts?

4.05 How do we ensure that the board of directors is safeguarding assets,

and that management complies with its policies and plans?

4.06 What are internal controls and how do we review them?

4.07 How do we manage and structure an internal audit function?

4.08 How do we manage and structure an external audit function?

4.09 What should we consider when looking at internal versus external

auditing?

4.10 How do we follow-up on examinations and audits?

4.11 What should we expect when meeting with the federal examiner?

4.12 How do we handle member complaints?

4.13 What other procedures should we consider?

4.14 Are there any other resources we can use?

4.15 What records can we access?

4.16 What do we need to document?

4.17 What if we find problems?

4.18 How do we coordinate our plans into a program?

Appendix

Sample Supervisory Committee Workplan

What are our

goals and

responsibilities?

4.01 You, the supervisory committee, have two general goals.

You must ensure that:

(a) Management’s financial reporting objectives have been met.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-2

(b) Management practices and procedures safeguard members’

assets.

To meet these two general goals, you are responsible for

determining whether your credit union managers have:

a) Established and maintained effective internal controls to

achieve the credit union’s financial reporting objectives.

These controls must meet the requirements of the

supervisory committee audit, verification of members’

accounts and your additional responsibilities. See 4.06 for a

definition of internal controls.

(b) Promptly prepared accounting records and financial reports

to accurately reflect operations and results.

(c) Properly administered the relevant plans, policies, and

control procedures established by the board of directors.

(d) Established policies and control procedures that safeguard

against error, carelessness, conflict of interest, self-dealing

and fraud.

You make those determinations primarily through conducting

audits and verifications.

What, then,

must we do?

4.02 At least once every calendar year, you must complete (or

have completed) the supervisory committee audit, and provide a

report on the audit to the board of directors. The audit must cover

the period elapsed since the last audit period.

At least once every two years, you must conduct a verification of

members’ accounts.

You must ensure that the board of directors is safeguarding

assets, and that management complies with their policies and

plans.

You must report to members at the annual meetings as stipulated

in Article V of the standard bylaws.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-3

You also should:

• Review internal controls.

• Hire and work with an internal auditor (if feasible for the

credit union).

• Hire and work with the external auditor (if feasible for the

credit union).

• Review examination and audit findings and follow-up to

ensure that management takes the necessary corrective

action. The action taken must be adequate to correct the

findings.

• Meet with the federal examiner as you or the examiner may

request.

• Research member complaints.

• Complete other recommended procedures.

While your responsibilities encompass a range of areas, the depth

of your review can vary. The internal control structure, size,

complexity, and financial stability of your credit union will influence

the extent of your review.

The supervisory committee serves a very important function in

smaller credit unions in particular, because of limited internal

controls. Smaller credit unions have fewer staff members and

they cannot segregate job responsibilities well. Supervisory

committee functions help to compensate for limited controls.

Active supervisory committees help to improve the credit union.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-4

What should we

know about the

annual audit?

4.03 You must complete the audit at least once each calendar

year. During the audit, you must review the structure of the credit

union’s internal controls and verify the accuracy of the credit

union’s records. You must prepare a report of your findings and

present the final audit report to the board of directors.

If you wish to undertake the audit yourself, this Guide provides

basic audit steps. You may also choose to hire outside assistance

to complete the audit for you.

• Chapter 5 addresses factors to consider in either case.

• Chapter 6 addresses use of an internal auditor.

• Chapters 7 and beyond provides guidance on completing the

audit yourself.

The NCUA examiner may review the audit workpapers during the

federal examination.

What should we

know about the

verification of

members’

accounts?

4.04 You must complete a verification of all members’ accounts

once every two years. This could entail simply requesting the

data processor to include a section on the member’s statement

regarding the verification. However, there are other control

issues.

• Chapter 24 fully describes the verification of accounts.

“Verifying member accounts” simply means requesting members

to respond to you if the activity or balances on their statements

are not accurate. The purpose of the verification is to detect

errors, and it is also a good control to prevent fraud. Sometimes a

verification is called a confirmation.

Closed Accounts. The purpose of verifying closed accounts is

again to detect errors, and guard against fraud. You request

verification that members closed their accounts, as the credit

union’s records reflect.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-5

You will verify closed accounts at least with the regular verification

of members’ accounts. We strongly recommend that you

complete the verification on a more timely basis, such as

quarterly. Usually, you mail a letter to closed account holders

requesting that they verify that they did close the account.

• Chapter 24 describes the verification of closed accounts.

How do we

ensure that the

board of

directors is

safeguarding

assets, and that

management

complies with its

policies and

plans?

4.05 It is not your responsibility to make operating decisions.

However, you must ensure that the board’s plans and policies are

reasonable, and that they protect the safety and soundness of the

credit union.

To determine what the board’s plans are, you should:

• Attend monthly board meetings or review board minutes.

• Review the business plan for reasonableness.

To ensure that operations are adequately controlled, you should:

• Review the board’s policies (Do they provide the structure for

adequate control?)

• Ensure that management is implementing these policies.

The examiner may identify material problems with board plans

and operating policies during the examination. You may want to

use the examination report as a resource to help with identifying

and improving any weaknesses in these areas. The examiner will

probably suggest additional steps that you need to take to assure

that the board and management take corrective action for material

problems. Your audit report should also document material

deficiencies in policies. Follow the procedures outlined below

under “How do we follow-up on examinations and audits?”.

If you believe that the board’s actions, imminent actions, or lack of

control will have a material negative impact on the credit union,
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-6

you should exercise your authority to take action (as outlined in

Chapter 2 of this guide). You should contact your examiner, the

NCUA regional office, or your state supervisory authority prior to

taking significant action.

What are internal

controls and how

do we review

them?

4.06 Internal controls include the staff structure, operating

procedures, and other measures within the credit union to:

• Safeguard assets.

• Check the accuracy and reliability of accounting data.

• Promote efficiency.

• Encourage compliance with board policies.

Internal controls minimize the possibility that errors or fraud

remain undetected for any length of time. Internal controls can

also help prevent errors.

Examples. An example of an internal control is establishing

passwords on the computer system. This control:

• Prevents unauthorized access.

• Helps to identify transactions by the user.

Another example would be the separation of duties between staff

with cash disbursement authority. If staff with access to generate

a check are different, and separate, from staff authorized to sign

the check, you minimize unauthorized disbursements. Collusion

between staff would be required to effect an unauthorized

disbursement.

Even small credit unions can establish internal controls. Review

of internal controls is one of your most important responsibilities.

Refer to the internal control section in Chapter 7 for guidance on

how to review internal controls.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-7

How do we

manage and

structure an

internal audit

function?

4.07 An internal auditor is generally an employee of the credit

union, but could be a consultant to the credit union, who reviews

the credit union operations for weak controls and practices, and

recommends improvements. Internal auditing could entail merely

a part-time employee or consultant, or an entire department. An

internal auditor could fulfill any of your responsibilities, as long as

you oversee his or her work.

We highly recommend that you use an internal auditor, when

feasible. Of course, such a position would be dependent on

whether the credit union could afford the expense, and if there is

enough work for the employee. An internal auditor could perform

some record keeping functions to increase his or her workload (for

example, preparing bank and other reconcilements, but he/she

could not then audit record keeping functions performed by

him/her-self). Alternatively, several credit unions could share an

internal auditor to defray expenses. Refer to Chapter 6 for more

information on the internal audit function.

How do we

manage and

structure an

external audit

function?

4.08 You manage an external audit function in much the same

way as an internal audit function. You decide what the auditors

will review, or accept their review recommendations. The auditors

can assist in performing some of your functions, such as following

up on weaknesses noted during the audit and examination. You

could consider quarterly or semi-annual contacts. You should hire

external auditors through use of an engagement letter. See

Chapter 5 for additional information on external audit matters.

What should we

consider when

looking at

internal versus

external

auditing?

4.09 You should consider the pros and cons in an external

versus internal audit environment, such as:

• Are there differences in expertise? Depending on the

training you provide, external auditors may be more up-todate on current topics. On the other hand, it may be difficult

finding an external auditor with extensive credit union

experience.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-8

• It may be easier to interview and hire the external auditor

(based on a known reputation).

• An external function could be tailored to the amount of

auditing you need. An employee may seek a full-time

commitment.

• Scheduling may be a problem with an external auditor.

• Contacts would be intense and brief with an external

function. Contact would be on-going with an internal auditor.

• An internal auditor would be more familiar with your

individual credit union. This could also lead to a better

relationship with other employees.

• An internal audit function may be less costly than an external

function.

How do we

follow-up on

examinations and

audits?

4.10 Examinations and audits should present a largely unbiased

view of the overall financial condition of the credit union. They

identify material as well as minor problems with the accounting

processes, controls, plans or policies. Formal examinations and

audit reports (including reports of reportable conditions or errors

and irregularities) will document any material findings. Obviously,

these reports correspond with your objectives, and are a strong

resource for your committee.

Examinations. The examination focuses on safety and

soundness concerns, as well as overall controls, regulation

compliance and record keeping.

Audits. The audit primarily focuses on accuracy of

accounting records, and the internal controls related to the

accounting records.

You should ensure that management addresses each of the

issues listed in all reports promptly. To aid you in this process, we
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-9

recommend that you request a report from management that

outlines actions taken to correct the problems identified. You

need to review management’s response to ensure that corrective

actions appear reasonable and adequate. If management did not

adopt the corrective actions suggested in the audit or examination

report, they should have developed an adequate alternative plan.

Particularly if you believe that management may not have

adequately addressed the problem, you or your representative

should review the area for progress. The audit chapters of this

guide provide a reference on auditing specific areas.

If your review supports that the problem still exists and you cannot

persuade management to take appropriate action, bring your

findings to the board of directors for resolution. In addition, you

should discuss the situation with your examiner or auditor if a

material problem remains unresolved.

What should we

expect when

meeting with the

federal

examiner?

4.11 The federal examiner should meet with you during the

annual examination, and will:

• Discuss the supervisory committee audit process with you.

• Let you know of any material findings noted during the

examination, and discuss plans to follow-up on these

findings (including any audit deficiencies).

• Discuss closed account verifications and the bi-annual

verification of member’s accounts (when you completed

them) and how you controlled the process.

• Discuss any other actions of the supervisory committee since

the prior examination.

• Offer the opportunity to ask questions.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-10

How do we

handle member

complaints?

4.12 You play an essential role in reviewing members’

complaints. You will want to make certain you handle complaints

in an impartial and independent manner to ensure that you treat

all members fairly. If a complaint identifies a policy or procedure

that needs correction, you will want to follow through to ensure

that the board of directors and credit union management

implement corrective changes.

Types of Complaints. Although the types of member complaints

vary greatly, the following are somewhat representative.

Concerns with:

1. Lending policies and procedures.

2. Loan rejections.

3. Annual meetings.

4. Share withdrawals.

5. Dividend rates and terms.

6. Credit union services.

Regardless of the nature of the complaint, you must conduct a full

and complete investigation.

Receipt of complaints. A member may complain either directly to

you or, as frequently happens, to the National Credit Union

Administration (NCUA). NCUA will normally refer the matter to

you. It will request that you investigate the complaint and furnish

the NCUA regional office with a written report. The regional office

then sends the member a final response letter.

Investigation of complaints. Regardless of how the complaint is

brought to your attention, it is suggested that you follow these

general steps when investigating the complaint (not necessarily in

the order given.)

(a) Read the complaint letter. Briefly outline the areas of

complaint and questions asked by the complainant.

(b) Determine the appropriate type of investigation.

(c) Interview the complainant, if possible. A personal interview

with the member is preferable. If you are able to interview

the member:
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-11

• Conduct interviews in private.

• Be careful not to express an opinion as to the probable

validity of the complaint.

• Conduct discussions in a courteous and professional

manner. Convey a sincere regard for the member’s

concerns.

• Keep an open mind. Some statements made by the

member may not be valid, but they do not disprove his/her

entire complaint. The member usually knows little of the

internal operation of the credit union, or standards of

credit worthiness.

• If the complaint is routine or simply a disagreement,

inform the member that they can resolve it directly with

credit union staff.

(d) Review the complainant’s credit union file.

(e) Review pertinent written credit union policies and

procedures, and determine their compliance with applicable

credit union laws and regulations.

(f) Review pertinent unwritten procedures (i.e., practices

observed by the credit union).

(g) Interview appropriate credit union officials and/or employees.

(h) Review several loans, if necessary, to determine the actual

practices of the credit union and how they relate to the

complaint.

(i) Determine the validity of the complaint.

• Do not rely on the credit union’s manager or employees to

do the investigation for the committee. You should obtain

all information firsthand, where possible. Try to determine

what actually happened, rather than obtaining various

versions of what happened.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-12

• You should not initiate a joint meeting between the

complainant and the credit union officials as a means of

resolving disputes or expediting the investigation. This is

often counter-productive and may intimidate the

complainant. You act as a liaison between members and

management when disputes arise.

• Remember that no one likes to be investigated. Credit

union officials and employees will often be defensive and

complainants may also be antagonistic. You will need to

be very skillful and tactful in obtaining the necessary

information without alienating any of the parties involved.

j) Work with the officials to develop plans to correct any

improper, unfair, or discriminatory practices, if applicable, or

make appropriate recommendations.

k) Have corrective action implemented or obtain agreements

from appropriate credit union officials and/or employees they

will make corrections within a specified time.

l) When applicable, prepare and submit the written report to

NCUA’s regional office. Write the report in a clear, concise,

and factual manner. NCUA will usually send the report to

the complainant as part of the regional office’s final response

to the individual.

m) If the complaint was made directly to the committee (and

NCUA is thus not involved), prepare and submit a written

response to the member.

n) You should maintain a file of all complaint resolutions.

What other

procedures

should we

consider?

4.13 Consider the following additional procedures:

• Concentrate additional review on any areas of weakness

identified in the annual audit or examination. Reference the

audit chapters for guidance in reviewing these particular
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-13

areas. The auditor or examiner may request that you

complete certain procedures.

• Conduct surprise cash counts (reference Chapter 8).

• Reconcile or verify the accuracy of the credit union’s bank

reconcilement for three concurrent months (reference

Chapter 8).

• Review all official, employees, and family member’s

accounts for preferential treatment and unusual activity

(reference Chapter (10), fraud section).

• Review a sample of loans for deficiencies in documentation

or quality (reference Chapter 10).

• Call a sample of members with new loans to ensure that the

loans are legitimate, representing the call as an informal

survey (reference Chapter 10).

• Trace a sample of new members to ensure that they are

eligible for membership.

• Review internal control reports (for example, supervisor

override reports, nonamortizing loan reports, etc.).

• Ensure that all employees take at least one week of

continuous vacation. 

• Help the auditor with the annual audit, if requested (this may

reduce the audit fee).

Are there any

other resources

we can use?

4.14 There are a number of resources for you to use, in addition

to this Guide. They include your credit union league, your auditor,

your federal examiner, and the Accounting Manual for Federal

Credit Unions. The appendix to this Guide also lists other

references. Management should be able to help you access

these resources.
Supervisory Committee Guide

WHAT ARE OUR RESPONSIBILITIES

Chapter 4

4-14

Which records

can we access?

4.15 You have access to all of the credit union’s records,

without exception. Of course, you are responsible for maintaining

strict confidentiality. You shouldn't remove credit union records

from the credit union.

What do we need

to document?

4.16 You should document all of your reviews to support your

work. The federal examiner will request to review your work.

What if we find

problems?

4.17 You should document and report all problems to

management for correction. You should also provide the board of

directors with your report. Reference Chapter 20 in the Guide,

“How do we report results to the board of directors?”.

Follow the same procedures listed under the “How do we followup on examinations and audits?” section above for ongoing

follow-up on material problems.

How do we

coordinate our

plans into a

program?

4.18 We recommend that you develop an annual work program.

We have included a sample program in the appendix to this

chapter. Of course, you will need to customize the program to

your credit union to focus on the credit union’s weaknesses.
APPENDIX 4A

SAMPLE SUPERVISORY COMMITTEE WORK PLAN

Note that several of your responsibilities depend largely on outside factors. For

example, primary follow-up on audits and exams, meeting with the federal examiner,

and member complaints will be handled on a flow basis.

You should review the board’s business plan as soon as it is finalized. This

example assumes that the board works on the plan in the fall and finalizes the plan

in October.

If your credit union has an internal auditor, you should maintain contact with the

auditor at least on a quarterly basis.

January • Complete the verification of member’s accounts, including

closed account verifications.

• Review personnel records to ensure that all employees took at

least one week of continuous vacation last year.

• If you do not plan to complete the audit, contact outside

accountants to request bids for the annual audit.

• Attend the monthly board meeting (Chairman, at a minimum).

• Follow-up on prior audit and examination findings if necessary.

February • Attend the monthly board meeting (Chairman, at a minimum).

• Review the bank reconcilement. Ensure that adjusting entries

are valid and not carried forward.

• Review employee, official, and related family member

accounts.

• If applicable, review bids from outside accountants, and select

accountant.

• Follow-up on prior audit and examination findings if necessary.
Supervisory Committee Guide

SAMPLE WORK PLAN

Appendix 4A

4A-2

March • Attend the monthly board meeting (Chairman, at a minimum).

• Conduct a surprise cash, traveler’s check, and money order

count (schedule for different days during the month).

• Follow-up on prior audit and examination findings if necessary.

April • Attend the monthly board meeting (Chairman, at a minimum).

• Conduct the annual audit. Maintain contact with the outside

accountant, if one is used.

• Verify closed accounts.

• Follow-up on prior audit and examination findings if necessary.

May • Review internal controls in the cash area.

• Call a sample of members with new loans to ensure that loans

are legitimate.

• Attend the monthly board meeting (Chairman, at a minimum).

Provide audit report to the board.

• Follow-up on prior audit and examination findings if necessary.

June • Request a response from management on any audit findings.

• Attend the monthly board meeting (Chairman, at a minimum).

• Conduct a surprise cash, traveler’s check, and money order

count (schedule for different days during the month).
Supervisory Committee Guide

SAMPLE WORK PLAN

Appendix 4A

4A-3

July • Verify closed accounts.

• Follow-up on prior audit and examination findings if necessary.

• Review and follow-up on management’s audit response.

• Review internal controls in the lending area.

• Review official, employee, and related family accounts.

• Attend the monthly board meeting (Chairman at a minimum).

• Follow-up on prior audit and examination findings if necessary.

August • Attend the monthly board meeting (Chairman, at a minimum).

• Review the bank reconcilement. Ensure that adjusting entries

are valid and not carried forward.

• Call a sample of new members to ensure that they are eligible

for membership.

• Follow-up on prior audit and examination findings if necessary.

September • Conduct a surprise cash, traveler’s check, and money order

count (schedule for different days during the month).

• Attend the monthly board meeting (Chairman, at a minimum).

• Follow-up on prior audit and examination findings if necessary.
Supervisory Committee Guide

SAMPLE WORK PLAN

Appendix 4A

4A-4

October • Review internal controls in the investments area.

• Review official, employee, and related family accounts.

• Verify closed accounts.

• Attend the monthly board meeting (Chairman a minimum).

• Follow-up on prior audit and examination findings if necessary.

• Ensure the credit union’s operating budget for next year

includes funding for external auditing, if applicable.

November • Review the board’s business plan.

• Attend the monthly board meeting (Chairman, at a minimum).

• Follow-up on prior audit and examination findings if necessary.

December • Attend the monthly board meeting (Chairman, at a minimum).

• Conduct a surprise cash, traveler’s check, and money order

count (schedule for different days during the month).

• Follow-up on prior audit and examination findings if necessary.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the NCUA Rules and Regulations §715.

Chapter 5 -- WHO MUST DO THE AUDIT?

5.01 Who may do an audit or verification?

5.02 What types of audit services satisfy the annual supervisory committee audit

requirement?

5.03 What must an audit involve?

5.04 Who hires the auditor?

5.05 What is the purpose of an engagement letter?

5.06 Who signs the engagement letter?

5.07 What is required in the engagement letter?

5.08 What should be included in an engagement letter of a supervisory committee

audit which does not address all of the required procedures?

5.09 Who receives the written report from the compensated auditor?

5.10 Who is responsible to ensure that the independent, compensated auditor and

the auditor’s reports comply with the terms of the engagement letter?

5.11 Who prepares the audit report if the supervisory committee or uncompensated

representative completes the audit?

5.12 Who has access to the written supervisory committee audit report?

5.13 Who is responsible for reviewing compliance with the Bank Secrecy Act?

Appendix

5A Sample engagement letter.

Who may do an

audit or

verification?

5.01 The answer to this question depends on the credit union’s

asset size and source of charter, and falls into one of three

categories of auditors:

(a) An independent accountant licensed by the state or

jurisdiction in which the audit is conducted.

(b) An independent, compensated qualified credit union

auditor.

(c) You, your internal auditor, or your designated, uncompensated representative.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-2

A compensated auditor means any accounting/auditing

professional, excluding credit union employees, who is

compensated for performing more than one compensated

supervisory committee audit and/or verification of member’s

accounts, or opinion audit, per calendar year.

An uncompensated auditor, for these purposes, means someone

who doesn’t perform more than one supervisory committee audit

and/or verification for remuneration per calendar year, even

though the auditor may be paid for the one audit he/she does

perform. The representative may or may not be a professional

accountant or auditor.

What types of

audit services

satisfy the annual

supervisory

committee audit

requirement?

5.02 You may use the following types of audit services to satisfy

the requirements of the supervisory committee audit

requirements. (Refer to R&Rs §§ 715.2 and 715.7)

(a) If your credit union is federally insured with assets of $500

million or more, the work must be performed by an

independent accountant licensed by the state or jurisdiction

in which the audit is conducted. He or she must perform an

opinion audit of the credit union’s financial statements.

(b) If your credit union is federally chartered with assets of more

than $10 million but less than $500 million, you have four

options:

i) As a) above.

ii) An opinion audit on the credit union’s balance sheet

performed by an independent accountant licensed by the

state or jurisdiction in which the audit is conducted.

iii) An examination of internal controls over call reporting

conducted by an independent accountant licensed by the

state or jurisdiction in which the audit is conducted.

iv) A supervisory committee audit which meets the minimum

requirements of this Guide.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-3

(c) Federally insured credit unions under $10 million in assets

may very likely choose to perform a supervisory committee

Guide audit due to resource constraints.

What must an

audit involve?

5.03 For a supervisory committee Guide audit, you or your

representative must:

a) Follow the Appendix 4A prescribed supervisory committee

work plan or comparable plan of your own development.

b) Annually complete all relevant internal control checklists/work

papers included in this Guide or comparable work papers

applying reasonable judgment as needed.

c) Annually complete all relevant work papers included in this

Guide or comparable work papers, performing specific audit

steps as required and applying reasonable judgment as

needed.

d) Complete the bi-annual verification of members accounts

consistent with Chapter 24.

e) Perform other duties as necessary: resolve members

complaints; follow-up on findings and recommendations in

previous examination and audit reports ensuring

management action/resolution; etc.

Additional work may be necessary, based on your findings and

judgment. This additional work may not be outlined in the Guide

and you may need to consider outside sources.

Who hires the

auditor?

5.04 You (the supervisory committee) must hire the auditor for

the engagement. The board, however, must authorize the budget

and approve the expense.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-4

In doing so, you may wish to:

• Ask other credit unions and trade associations for

references.

• Obtain competitive bids from auditors with credit union

experience.

• Ask the auditor or auditing firm representative relevant

questions.

You should inquire about:

• The experience level of the individuals who will complete the

audit and their or the firm’s knowledge of credit union

operations and regulations.

• Professional certification of the individuals who will complete

or supervise the audit.

• The time period of the year for scheduling the audit

(specifically the time periods where price would be

advantageous).

• The individual’s or firm’s audit program.

• The time frame for receiving the final audit report and related

reports of reportable conditions or errors and irregularities.

• Meeting with the in-charge auditor at the end of the

engagement.

You must obtain an engagement letter which complies with §715

of the NCUA Rules and Regulations. Refer to Appendix 5A for a

sample letter.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-5

What is the

purpose of an

engagement

letter?

5.05 The purpose of the engagement letter is to facilitate

communication at the contracting point. It also documents “who

agreed to do what," and provides the credit union with an

enforceable contract. The engagement of an independent,

compensated auditor to perform all or a portion of a supervisory

committee audit shall be evidenced by an engagement letter.

Who signs the

engagement

letter?

5.06 The compensated auditor signs the engagement letter.

The signed engagement letter is acknowledged by you (the

supervisory committee) prior to the start of the audit.

What is required

in the

engagement

letter?

5.07 You must ensure the following items are included:

• Specify the terms, conditions, and objectives of the

engagement.

• Identify the basis of accounting to be used (examples,

generally accepted accounting principles (GAAP) vs.

regulatory accounting practices (RAP)).

• For non opinion audits, include an appendix setting forth the

procedures to be performed.

• Specify the rate of, or total, compensation to be paid for the

audit.

• Upon completion of the engagement, the auditor will deliver

a written audit report to the supervisory committee.

• Notice in writing, either within the audit report or a separate

report, of any internal control reportable conditions and/or

irregularities or illegal acts which come to the auditor’s

attention during the normal course of the audit.

• Specify a target date of delivery of the written reports.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-6

• Certify that NCUA staff or its designated representative will

be provided unconditional access to the complete set of

original working papers either at the credit union or at a

mutually agreeable location for purposes of inspection.

• Acknowledge that working papers shall be retained for a

minimum of three years from the date of the written audit

report.

What should be

included in an

engagement

letter of a

supervisory

committee audit

which does not

address all of the

required

procedures?

5.08 You must ensure the engagement letter:

• Generally identifies the excluded items, if any.

• States that, because of the exclusion(s), the resulting audit

will not, by itself, fulfill the scope of a supervisory committee

audit.

• Includes a caution that the supervisory committee will remain

responsible for fulfilling the scope of a supervisory committee

audit with respect to the excluded items.

Who receives the

written report

from the

compensated

auditor?

5.09 You, the supervisory committee, must receive the written

audit report.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-7

Who is

responsible to

ensure that the

independent,

compensated

auditor and the

auditor’s reports

comply with the

terms of

engagement

letter?

5.10 You, the supervisory committee, are responsible. You must

meet with the independent compensated auditor at the end of the

audit to determine if the auditor complied with the terms of the

engagement letter.

Who prepares the

audit report if the

supervisory

committee or

uncompensated

representative

completes the

audit?

5.11 In this case, you, the supervisory committee, must prepare

the written report of the supervisory committee audit. Refer to the

reporting chapter in this Guide.

Who has access

to the written

supervisory

committee audit

report?

5.12 You, the supervisory committee, must provide the report(s)

to the board of directors.

You must, upon request, provide to the National Credit Union

Administration, a copy of each of the written reports received from

the auditor.

You must provide a summary of the results to members of the

credit union at the next annual membership meeting.
Supervisory Committee Guide for FCUs

WHO MUST DO THE AUDIT?

Chapter 5

5-8

Who is

responsible for

reviewing

compliance with

the Bank Secrecy

Act?

5.13 You may include the review of compliance with the Bank

Secrecy Act in the engagement letter with the auditor. The Bank

Secrecy Act is designed to detect the incidence of money

laundering and to provide a paper trail of activities. §748.2 of the

NCUA Rules and Regulations requires independent testing for

compliance by credit union personnel or outside parties.
APPENDIX 5A

ILLUSTRATIVE ENGAGEMENT LETTER

(adopted, with modifications, from AICPA industry guide, “Audits of Credit Unions”)

Services Other Than Financial Statement Opinion Audits

Performed by Licensed Individuals

Supervisory Committee [Date]

XYZ Credit Union

This letter is to confirm our understanding of the terms and objectives of our engagement and

the nature and limitations of the services we will provide to XYZ Credit Union for the period

ending [date].

We will apply certain procedures to selected records and transactions for the purpose of

helping you to complete your supervisory committee audit.

The procedures to be performed are summarized in the supplement to this letter. Because

those procedures will not constitute an audit made in accordance with generally accepted

auditing standards, we will not express an opinion on any of the items specified in the

supplement or on the financial statements of the credit union taken as a whole. The scope of

this audit as outlined in the supplement does not include an evaluation of all areas that

generally are of higher risk in the credit union industry, such as [securities held or the

collectibility of loans, the adequacy of collateral thereon, or the reasonableness of the

allowance for loan losses[. We caution you that you remain responsible for completing the

audit work necessary to meet regulatory requirements in these areas excluded from our audit

scope.

Our engagement will not include a detailed examination of all transactions and cannot be

relied on to disclose errors, irregularities, or illegal acts, including fraud or defalcations, that

may exist. However, we will inform you of any such matters that come to our attention.

We direct your attention to the fact that management has the responsibility for the proper

recording of the transactions in the accounting records and for preparation of financial

statements in conformity with generally accepted accounting principles.

Certain of the procedures described in the supplement to this letter will be applied on a

surprise basis during the year after we consult with the appropriate regulatory agencies to

ensure that the date selected will not conflict with their examinations.

Our report will include a summary of the accounts and elements subject to our audit and the

procedures performed.

This report will be issued solely for the information of the credit union’s supervisory committee

and management and appropriate regulatory agencies [or other specified third parties]; it is not

to be used by any other parties because of the restricted nature of our work. Our report will
Sample Engagement Letter

Appendix 5A

5A-2

also contain a paragraph indicating that had we performed additional procedures or had we

made an audit of the financial statements in accordance with generally accepted auditing

standards, other matters might have come to our attention that would have been reported to

you.

Our fees are based on the time required by the individuals assigned to the engagement, plus

direct expenses. Individual hourly rates vary according to the degree of responsibility involved

and the skill required. Interim billings will be submitted as services are rendered and as

expenses are incurred.

We will be pleased to discuss this letter with you at any time. If the foregoing is in accordance

with your understanding, please sign the copy of this letter in the space provided and return it

to us.

Sincerely yours,

__________________________________

[Signature of Independent Auditor]

Acknowledged:

____________________________________

[Name of Credit]

____________________________________

[Signature of Supervisory Committee Chairman]]

[Date]
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the NCUA Rules and Regulations §715.

Chapter 6 -- SHOULD WE HAVE AN INTERNAL AUDIT FUNCTION?

6.01 Who should have an internal auditor?

6.02 How can an internal audit function assist us?

6.03 What are our responsibilities with regard to the internal audit function?

6.04 What are the board of directors’ responsibilities?

6.05 How do we go about hiring an internal auditor?

6.06 What qualifications should our internal auditor have?

6.07 What is the audit plan and what should it include?

6.08 What reports should the internal auditor prepare for us and to whom

should we deliver them?

Who should have

an internal

auditor?

6.01 All large credit unions with complex operations should give

serious consideration to having an internal audit department.

Other credit unions are urged to have internal audit functions.

The benefits gained from the recommendations stemming from

internal audits can be invaluable to the credit union’s operations.

How can an

internal audit

function assist

us?

6.02 The internal audit function can assist you in:

• Ensuring accurate and reliable information is produced by

the credit union.

• Determining the effectiveness of the internal control

structure.

• Promoting operational efficiencies.

• Safeguarding assets of the credit union.
Supervisory Committee Guide

SHOULD WE HAVE AN INTERNAL AUDIT FUNCTION?

Chapter 6

6-2

• Encouraging compliance with internal policies and

procedures as well as external laws and regulations.

An internal audit can be:

• An integral part of the evaluation of internal controls.

• A check and balance on management functions.

• An effective measure for the prevention and detection of

loss.

An extremely useful and valuable function of internal auditors is to

aid, assist, and help coordinate the work of regulators and

external auditors. When an internal auditor is permitted to act with

the necessary degree of independence, reliance on his/her work

can reduce the amount of time and expense outside parties must

commit to the review and analysis of the credit union. See more

discussion of independence in paragraph 6.06.

The role of the internal auditor must move beyond just assessing

internal controls and safeguarding assets. As the credit union

industry becomes more technologically advanced, changes in the

day-to-day operations can become overwhelming. The internal

audit function must keep pace with changes and innovations.

Internal auditors can provide invaluable analysis and support for

new or proposed business plans or strategies.

And finally, the supervisory committee may choose to use the

internal auditor to perform the Supervisory Committee Guide audit

under § 715.7(c). Note, however, that the employment of an

internal auditor does not replace the supervisory committee or its

function.

What are our

responsibilities

with regard to the

internal audit

6.03 You, the supervisory committee, play a key role in the

internal audit function. It is best if the internal auditor reports

directly to you, and as such, it is your responsibility to routinely

make yourselves available to the internal auditor. You should aid
Supervisory Committee Guide

SHOULD WE HAVE AN INTERNAL AUDIT FUNCTION?

Chapter 6

6-3

function? in the development of the audit program and should establish a

monitoring and follow-up procedure to measure the internal

auditor’s performance and effectiveness. A key role you must

play is in acting as a conduit between the internal auditor and the

board of directors and management staff. You must be

instrumental in facilitating these communications.

What are the

board of

directors’

responsibilities

with regard to the

internal audit

function?

6.04 The board of directors must establish a corporate

environment which allows the internal auditor to perform his duties

freely and without restriction. The board should ensure sufficient

resources are allocated to the internal audit function in order for it

to conform to the standards of internal auditing. The board must

require management to respond to audit reports and to take

necessary and appropriate corrective action(s).

How do we go

about hiring an

internal auditor?

6.05 There are several methods of employing an internal

auditor. There are national, regional, and local organizations of

internal auditors which may serve as resources for finding

appropriate internal audit employees.

Smaller credit unions with limited resources may want to consider

sharing an internal auditor with other small credit unions on a

consulting basis. Under these arrangements, you generally

contract for a quantity of hours of the internal auditor’s time.

It is important that you hire a qualified individual to carry out this

critical responsibility.

What

qualifications

should our

internal auditor

have?

6.06 Your internal auditor’s qualifications should be

commensurate with the size and complexity of your credit union.

All internal auditors should possess:
Supervisory Committee Guide

SHOULD WE HAVE AN INTERNAL AUDIT FUNCTION?

Chapter 6

6-4

• Academic credentials and/or technical training and

proficiency.

• A commitment to continuing education and professional

development.

• Well-developed written and oral communication skills.

• Independence.

Continuing Professional Development. Your internal auditor’s

continuing education is vital for ensuring efficient and effective

audits with recommendations that enhance the overall operations

of the credit union.

Independence. Independence is defined as “freedom from the

influence, guidance, or control of another or others.” An internal

auditor’s independence is vital to achieving reasonable assurance

that internal controls are functioning properly, will safeguard the

assets of the credit union and prevent and detect errors and

irregularities.

One measure of an internal auditor’s independence is the

auditor’s location within the organizational structure of the

credit union. The internal auditor should report directly to

you, the supervisory committee. The organizational status of

the internal auditor speaks to objectivity. It is important to

note the only way the internal audit function can operate

effectively and add value to the credit union (in meeting

regulatory audit and verification requirements) is by ensuring the

reporting relationship is at a very high level.

What is the audit

plan and what

should it include?

6.07 A sample supervisory committee workplan has been

provided in Chapter 4, Appendix 4A.

The internal auditor’s audit plan should generally be the work

anticipated to be completed within the next year. However, the
Supervisory Committee Guide

SHOULD WE HAVE AN INTERNAL AUDIT FUNCTION?

Chapter 6

6-5

frequency of an audit of certain operational areas or functions

should be based on the attendant risk factors. The plan should

have a degree of flexibility to allow for audits of the adequacy of

controls within new systems and/or significant changes to existing

systems. An evaluation by the internal auditor should be part of

contemplated changes and modifications to systems and

functions.

When determining the scope of work, the internal auditor must

consider: (a) size and scope of the operation or function relative

to the size and complexity of the credit union; (b) the existence of

appropriate written policies and procedures; and (c) the effect

potential losses would have on the financial condition of the credit

union.

What reports

should the

internal auditor

prepare for us

and to whom do

we deliver them?

6.08 Formal reports should pinpoint the areas of weakness and

contain clear, concise recommendations for corrective actions.

These reports should be delivered to you, the supervisory

committee. You should then provide them to the board and

management staff having the responsibility for implementing

corrective actions. You should follow-up on recommendations to

ensure timely and effective implementation.

Your internal auditor must document the work performed. The

workpapers should detail audit programs and analyses that clearly

reflect the procedures completed, the extent of testing, and the

reported results.

At least once each year, the internal auditor should prepare a

summary report of all audit activities for you. You should share

this information with the board of directors and senior

management. The report should include summaries of

recommended actions and responses to the recommendations by

the appropriate staff. The report should express an opinion of the

overall condition of the controls and operations.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the NCUA Rules and Regulations §715.

Chapter 7 -- WHAT STEPS MUST WE TAKE TO COMPLETE THE

AUDIT OURSELVES?

7.01 What is involved in doing the audit ourselves?

7.02 Why are sound internal controls important?

7.03 How do we learn about the credit union’s internal control structure?

7.04 Could you discuss further the three elements of an internal control

structure?

7.05 What is involved in planning the audit?

7.06 What is materiality?

7.07 What should be our focus when reviewing internal controls?

7.08 What audit testing is necessary and most effective?

7.09 What should be the focus of our testing?

7.10 What additional audit tests may be necessary?

7.11 For cash?

7.12 For investments?

7.13 For loans?

7.14 For shares?

7.15 How do we review related party transactions?

7.16 What reports should we review as part of the audit if the credit union

has an EDP system?

7.17 What are the considerations in audit planning for manual credit unions?

7.18 What are some of the main audit concerns with manual credit unions?

7.19 What other issues must we review in the audit stage?

What is involved

in doing the audit

ourselves?

7.01 You must:

• Complete Guide working papers (or comparable worksteps)

dealing with the credit union’s system of internal controls.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-2

• Develop a credit union specific audit program using Guide

working papers (or comparable worksteps) adjusted to your

credit union’s needs.

You must plan your audit tailored to your credit union’s specific

needs and complexity.

Why are sound

internal controls

important?

7.02 Internal controls comprise the plans of organization and

operating procedures and measures within the credit union to

safeguard assets, check the accuracy and reliability of accounting

data, promote operational efficiency, and encourage adherence to

the prescribed managerial policies. Such plans and procedures

need to be in writing.

Section 113 of the Federal Credit Union Act states that the board

of directors shall have the general direction and control of the

affairs of the credit union. The board is responsible for the proper

and profitable conduct of credit union operations, the safety of

credit union assets, and the accuracy of financial statements. The

directors themselves cannot normally perform the work resulting

from these responsibilities, so they retain employees to act for

them. However, since the board of directors still retains overall

responsibility for the affairs of the credit union, they must establish

internal controls for the operation of the credit union.

It is important that you understand the internal control structure

functioning within your credit union. If your credit union is small, it

may be difficult to achieve the segregation of duties critical to an

effective internal control system and therefore, more directed audit

testing may be advisable.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-3

How do we learn

about the credit

union’s internal

control

structure?

7.03 An internal control structure should include three elements:

• The control environment.

• The accounting system.

• The control procedures.

You must become familiar with each element.

Could you

discuss further

the three

elements of an

internal control

structure?

7.04 The control environment takes into consideration:

• Management policies and plans.

• Organizational structure.

• Involvement of officials (board and committee).

• Assignment of authority and responsibility.

• Personnel policies.

• Examinations.

The accounting system takes into consideration:

• The quality of the books and record keeping system.

• The maintenance of accounting records.

• The financial reporting system.

• The preparation of accurate financial statements.

The control procedures take into consideration:

• Appropriate authorization of transactions.

• Sound segregation of duties.

• Safeguarding of credit union assets -- particularly cash,

investments, and fixed assets.

• Security access level and controls over the EDP system.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-4

• Management or supervisory committee periodic reviews and

test checks.

What is involved

in planning the

audit?

7.05 Audit planning is a very important part of the audit, since

you determine the scope of the audit in the planning stage. An

important factor in planning is the qualifications of the individuals

who will perform the audit. To adequately plan the audit, you must

have experience with and knowledge of the credit union products

and services. See Chapter 3 of this Guide for additional guidance

on qualifications of the person(s) performing the audit.

Specific materials to use in audit planning:

• Recent statement of financial condition and income

statement. Recent NCUA Financial Performance Report.

• Recent NCUA Supervisory Examination Report.

• Credit union charter and bylaws.

• Credit union policies.

• Board meeting minutes.

• Roster of employees and officials.

• NCUA Rules and Regulations (emphasis on recent changes

and new Regulations).

• Last year’s audit report and working papers.

• Surety bond company risk management audit report.

• Loan, cash, investment, and share internal control check

lists.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-5

Specific items to consider in audit planning:

• Local economic trends.

• Stability of the sponsor or field of membership.

• Personnel changes.

• Materiality level (see later section of this chapter).

• Type of Electronic Data Processing (EDP) system and

controls.

What is

materiality?

7.06 Materiality is a very subjective concept. It is defined in

section 2000 of the NCUA Accounting Manual.

A statement, fact or item is material if, giving full consideration to

the surrounding circumstances as they exist at the time, it is of

such a nature that its disclosure, or the method of treating it,

would be likely to influence or to make a difference in the

judgment and conduct of a reasonable person. The accumulation

of many small items, each of which in itself wouldn’t be material,

would be material if the overall effect would tend to influence the

judgment and conduct of a reasonable person.

Materiality is influenced by total assets, total capital and

profitability.

A benchmark you might choose for determining materiality could

be one half of one percent of total assets, (for credit unions with

satisfactory capital and profitability). This level is most likely a

lower materiality threshold than many CPAs would choose if

performing an opinion audit for credit unions.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-6

What should be

our focus when

reviewing internal

controls?

7.07 You evaluate the effectiveness of the internal control

structure policies and procedures in preventing or detecting

material misstatements in the financial statements.

We provide sample internal control check lists in this Guide for

each of the main elements of the credit union financial statement.

We designed these check lists to provide a basis for

understanding the credit union’s internal control structure. You

identify an internal control weakness by reviewing the internal

control questions with a “no” response.

Some of the factors which may be problematic include:

• One or two people do the work due to limited staff size.

• Lack of board approved policies for lending, investments,

borrowing, and operating expenses.

• Lack of segregation of duties (no dual controls for key areas

such as cash, loans, investments and shares).

• Lack of mandatory vacation policy for all employees.

• Failure to maintain adequate audit trails.

• Record keeping problems (accounting and financial

statements are behind, not reconciled, or materially out-ofbalance).

• High level of operating expenses.

• Poor loan quality.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-7

What audit

testing is

necessary and

most effective?

7.08 The two categories of audit tests generally are:

a) Tests of balances.

b) Analytical procedures.

According to the AICPA Credit Union Audit Manual:

“Tests of balances are procedures applied to the individual

items that compose an account balance or class of

transactions. The tests involve confirmation, inspection, or

observation procedures to provide evidence about the

recorded amount.”

“Analytical procedures are tests applied to the total

recorded amounts and are based on the existence of

plausible and consistent relationships among financial

statement elements or between financial and non-financial

amounts."

Tests of balances provide stronger evidence and are more

effective. We recommend tests of balances for gathering

satisfactory audit evidence.

What should be

the focus of our

testing?

7.09 You should perform tests to determine whether:

• Assets or liabilities of the credit union exist at a given date

and whether recorded transactions have occurred during a

given period.

• All transactions and accounts that should be presented in

the financial statements are so included.

• Asset, liability, income and expense components have been

included in the financial statements at appropriate amounts.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-8

• Assets are the rights of the credit union and liabilities are the

obligations of the credit union at a given date.

• Particular components of the financial statements are

properly classified, described and disclosed.

What additional

audit tests may

be necessary?

7.10 Based on your review of the internal control structure,

competency of management, and complexity and size of your

credit union, you should determine what additional tests may be

necessary. Examples of increased audit testing are provided

below for various audit areas: cash, investments, shares, etc.

7.11 For Cash? Cash on Hand. You complete more than one

cash count as part of the audit. You complete random, surprise

cash counts of teller cash and vault cash.

Cash Items. You complete more than one travelers checks count

as part of the audit.

You confirm the balance of travelers checks with the travelers

checks company more often.

Cash in Bank. You review/test more than one month of bank

account reconcilements. For example review two or three nonconsecutive month-end bank reconcilements. You expand the

testing period for the receipts with deposits tests. For example,

test two months of general ledger account activity.

7.12 For Investments? You:

• Perform a detailed review of the investment portfolio.

• Review all investments outstanding as of the audit date,

(Trace to statements or safekeeping receipts).

• Review a random selection of investment purchase and

redemption transactions during the audit period for proper

accounting treatment.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-9

• Confirm investment accounts more than one time during the

audit period.

7.13 For Loans? You:

• Expand the sample size of your loan review.

• Test the delinquency status for a larger portion of the loan

portfolio.

• Review month-end loan account general ledger balancing

procedures for more than one month-end date. For

example, compare the General Ledger loan total to the total

of all loan trial balances for three non-consecutive monthend dates.

• Increase the scope of your review of loan computer file

maintenance (loan data change) reports.

• Review the extent and appropriateness of any extension

agreements used.

7.14 For Shares? You:

• Review month-end share account general ledger balancing

procedures for more than one month-end. For example,

review balancing information for three month-end dates.

• Review negative share account reports for several other

dates (e.g., mid-month and month-end) other than just the

most recent or audit date report.

• Be alert for large volume (both number of transactions and

dollars) for individual accounts.

• Review the accounting for returned NSF share drafts and

NSF ATM transactions, if applicable.

• Review month-end dormant (inactive) share account reports

for several month-end dates.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-10

• Review a sample of transactions on dormant accounts.

(Determine if dual control was necessary to authorize a

transaction on a dormant share account.)

How do we

review related

party

transactions?

7.15 Related Party Transactions. The review of related party

transactions, (in the most basic approach) involves the review of

employee's and official's loan and share accounts. You:

• Review loans to determine compliance with credit union

policy.

• Review loan interest rates and terms to determine if

preferential treatment exists. (Sometimes employees may

have different rates).

• Review loan account history and share account history to

determine if account activity is proper.

• Conduct further testing of related party transactions by

reviewing the loans and share accounts for relatives of

employees and officials.

Refer to Chapter 20 in this Guide, “How Do We Audit Related

Party Transactions?,” for more information.

What reports

should we review

as part of the

audit if the credit

union has an

EDP system?

7.16 You should review the following reports:

• Negative share reports.

• Unposted item reports for NSF drafts and NSF ATM

transactions.

• Computer file maintenance (data change) reports -- focusing

on loan data changes and address changes.
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-11

• Loans by interest rate summary -- look for loans with

unusually low interest rates.

• Paid ahead loan report -- review the reason the loan is paid

ahead more than 60 days.

• Dormant (inactive) share account reports.

• Any exception reports.

The above reports are typically available at the end of each

business day or at month-end.

Refer to Chapter 21 of this Guide for more information.

What are the

considerations in

audit planning for

manual credit

unions?

7.17 Manual credit unions (non-automated) will require a

somewhat different planning approach particularly in regards to

audit scope. Since the general ledger records are manual, we

recommend the following audit procedures:

• Extend testing/footing of the Journal of Cash Receipts (JCR)

for a minimum one month period.

• Trace summary postings from the JCR to the individual

general ledger accounts (e.g., share and loan ledger) for a

one month period.

• Foot the total of member share and loan records for three

month-end periods.

• Select a sample of new loans from the manual loan

officer/credit committee minutes and trace the loan

information from the loan notes back to the minutes (10).

• Review a sample of loan records for proper allocation of

principle and interest (5).
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-12

• Review a sample of loan records for proper delinquency

calculation.

• Review a sample of share records for proper dividend

calculations (5).

• Foot the general ledger trial balance of accounts for the

month-end audit date to ensure that balances are correct for

balance sheet and income statement account categories.

• Trace the accounts on the general ledger trial balance to the

credit union’s financial statements to verify correctness.

What are some of

the main audit

concerns with

manual credit

unions?

7.18 The audit should include testing of the following areas:

• Accurate loan delinquency reporting.

• Correct footing of the loan and share records.

• Correct calculation of loan principle and interest when

payments are received.

• Correct calculation of share dividends.

What other

issues must we

review in the

audit stage?

7.19 You review the following areas for compliance:

• Record preservation policy, §749 of the NCUA Rules and

Regulations (Rules and Regulations);

• Security program policy, §748.0 of the NCUA Rules and

Regulations;

• Bank Secrecy Act compliance program and procedures,

§748.2 of the NCUA Rules and Regulations;
Supervisory Committee Guide

WHAT STEPS MUST WE TAKE TO COMPLETE THE AUDIT OURSELVES?

Chapter 7

7-13

• Fidelity bond and insurance coverage, §701.20 of the NCUA

Rules & Regulations;

• Investments in and Loans to Credit Union Service

Organizations, §712 of the NCUA Rules and Regulations

and,

• FCU ownership of Fixed Assets, §701.36 of the NCUA Rules

& Regulations.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 8 -- HOW DO WE AUDIT CASH?

8.01 What general ledger accounts are part of the cash area?

8.02 What off balance sheet cash items need to be audited?

8.03 What are the general objectives in auditing cash?

8.04 How do we learn about internal controls over cash?

8.05 How do we audit cash in the bank?

8.06 How do we audit the change fund?

8.07 How do we audit petty cash?

8.08 How do we audit wire transfers?

8.09 How do we audit travelers checks?

8.10 How do we audit money orders?

Appendices

8A Internal Control Checklists.

8B Cash-in-bank Account Reconcilement Form.

8C Receipts To Deposit Test Form.

8D Sample Confirmation Letter For Cash-in-bank Accounts.

8E Cash Count Sheet.

8F Change Fund Recap Form.

8G Travelers Check Inventory Form.

8H Sample Confirmation Letter For Travelers Checks.

What general

ledger accounts

are part of the

cash area?

8.01 The accounts identified in the Accounting Manual for

Federal Credit Unions as the 730 series of general ledger

accounts usually identify the cash-classified accounts.

Cash accounts include:

• Cash-in-bank (savings and checking accounts).

• Change fund accounts (cash on hand).

• Petty cash.

In some instances, an “in-house” draft account is used by the

credit
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-2

union as a checking account. In-house draft accounts are part of

the scope of the cash area. Credit unions which own ATM

machines may also have separate general ledger accounts for

ATM change fund. Change fund is the term used for teller and

vault cash on hand.

Wire transfer policies and procedures are also important. Wire

transfers are the fastest and easiest way for cash to leave the

credit union. A large sum of cash may be transferred via a wire

transfer. Wire transfers are initiated by a telephone transaction or

by computer terminals which have the capability, such as a

fedwire terminal.

To assist you in reviewing the cash area, work papers, sample

confirmation forms, and instructions are included at the end of this

chapter.

What off balance

sheet cash items

need to be

audited?

8.02 If the credit union offers travelers checks and money

orders, you must review these items. Travelers checks and

money orders are usually on consignment with an outside

company and are easily converted to cash. See Appendices 8G

and 8H for sample workpapers.

What are the

general

objectives in

auditing cash?

8.03 You want to assess whether or not cash:

• Exists and is a credit union asset.

• Balances are complete and accurate.

• Transactions have been properly recorded and all reconciling

items identified for the period under audit.

• Restricted cash (limited as to use) is so identified and

labeled.

To do this, you must:
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-3

• Review internal controls over cash.

• Perform tests of controls.

• Determine the audit testing necessary to meet the above

objectives.

How do we learn

about internal

controls over

cash?

8.04 Since cash is a liquid asset, internal controls are a very

important audit concern. The potential for inappropriate activities

and fraud make audit procedures for the cash area a critical part

of the annual audit.

One way to review the internal controls is for you to complete the

internal control checklists in this guide. Internal control checklists

for cash can be found in Appendix 8A.

How do we audit

cash in the bank?

8.05 See Appendix 8D for sample workpapers. You must:

• Determine if internal controls are adequate.

• Review and test each cash-in-bank account to determine

that accounting is proper.

• Review each bank account to determine if the month ending

balance of the account, as of the audit date, is accurate.

• Determine if cash-in-bank is properly classified on the

statement of financial condition.

In applying audit tests, you should:

• Review the internal control checklist.

• Complete and mail bank confirmations as of the audit date.
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-4

• Review bank account reconciliations as of the audit date.

• Foot the bank account reconciliations.

• Trace the bank account balance on the reconciliation to the

bank statement.

• Trace the general ledger balance on the reconciliation to the

general ledger trial balance.

• Trace all significant reconciling items to supporting

documentation (bank statements if applicable).

• Trace the amount reported as a deposit in transit to the

following month’s bank statement as a deposit.

• Trace the amount reported as a deposit in transit to the

general ledger history for the same month of the bank

reconciliation.

• Foot the outstanding checks list.

• Trace the outstanding checklist as of the audit date to the

following month list of checks cleared on the bank statement.

• Review original checks issued for the month of the audit for

unusual transactions, (check copies may be reviewed if the

original checks are not returned). A random selection of

another one-month period is recommended also.

• Review any inter-bank transfers recorded on the general

ledger for the month of the audit period to determine that

transfers are correctly accounted for in the proper period.

• Complete a reconciliation of receipts with deposits.

How do we audit

the change fund?

8.06 You must:
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-5

• Determine if internal controls are adequate.

• Complete an unannounced change fund count and

determine if the change fund agrees with the credit union

accounting records. See Appendix 8F for sample

workpapers.

• Determine if the change fund is properly classified on the

statement of financial condition.

In applying audit tests, you should consider procedures to:

• Review the internal control checklist for the change fund.

• Complete a 100 percent change fund count using a cash

count sheet for all teller cash, vault cash and ATM cash (if

applicable).

• Total the individual cash count sheets and compare to the

tellers’ proof sheets (credit union balancing information).

• Total all cash count sheets for each applicable general

ledger account and compare the amount of cash counted

with the effective date of the general ledger balance.

• Review petty cash fund procedures and count petty cash if

material.

• Investigate any significant difference between the cash count

balance and the general ledger balance.

• Review the statement of financial condition and determine if

the change fund is accurately reported.

How do we audit

petty cash?

8.07 You must:

• Determine (use your judgment) if the amount in petty cash is

material. If material, complete a cash count.
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-6

• Determine if the account is reconciled at least monthly by

employees who otherwise do not have access to the fund or

fund records.

If it is deemed important to count the petty cash:

• Complete a cash count of the petty cash funds using a cash

count sheet. Refer to the sample cash count sheet included

in the Appendix to this chapter.

• Include the total of paid receipts in the petty cash fund as a

line item on the cash count sheet.

• Total the amount of cash and receipts counted.

• Compare the total amount counted with the general ledger

balance of Petty Cash.

• Investigate any significant difference between the general

ledger balance and the count of petty cash.

How do we audit

wire transfers?

8.08 You complete the following:

• Review the internal controls for wire transfers. You may use

the internal control checklist for wire transfers which is

included in this Guide. See Appendix 8A for Internal Control

Checklist.

• Test a sample of material wire transfers recorded during the

audit month when auditing activity in the cash-in-bank

account. Trace large dollar amount wire-outs, (credits

recorded to the general ledger account) to the appropriate

cash-in-bank account.

• Test a sample of wire transfers to review if authorized

individuals completed the transfer. Supporting source

documentation (such as journal vouchers or a log) should be

maintained to document who completed the wire transfers.
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-7

• Ensure that the individuals who perform the wire transfers

aren’t allowed to reconcile the bank accounts which are used

for wire transfer activity.

How do we audit

travelers checks?

8.09 You must:

• Determine if internal controls are adequate.

• Complete a count of the travelers checks inventory.

• Determine if the inventory consists of the same dollar

amount reported by the travelers checks company.

In applying audit tests, you should:

• Review the internal control checklist.

• Complete a 100 percent count of the travelers checks

inventory.

• Compare the total amount of the travelers checks inventory

with the credit union subsidiary record (which is kept for

balancing purposes).

• Investigate any significant differences when comparing total

travelers check counted with the subsidiary record.

• Confirm the balance of the travelers checks directly with the

travelers checks company.

• Compare the written confirmation received from the travelers

checks company with the inventory listing completed on the

date of the count.

• Investigate any significant differences between the written

confirmation and the count.
Supervisory Committee Guide

HOW DO WE AUDIT CASH?

Chapter 8

8-8

How do we audit

money orders?

8.10 Money orders are audited by reviewing the general ledger

account for Money Orders Payable. This account is usually

reported as a liability account on the general ledger. As money

orders are sold, the liability account is credited. When funds are

transferred to the money order company, the general ledger

account is debited to clear the payable account. Funds are

usually remitted to the money order company weekly or daily.

You complete the following procedures:

• Determine if internal controls are adequate. A sample

internal control checklist is provided in Appendix 8A. You

may use this internal control checklist for your review.

• Review the reconcilement for the Money Orders Payable

general ledger account as of the audit date. Determine if the

Money Orders Payable general ledger account is properly

clearing as funds are remitted to the money order company.

The dollar amount of money orders sold/issued must agree

with the amount remitted to the money order company for

the particular time period involved.

• Determine if the money order supply is properly secured to

prevent unauthorized use. Check to see if the money order

supply is kept under lock and key and is under dual control.

• Determine if copies of money orders are retained for

possible future investigation. Copies of money orders issued

are usually retained in the individual teller’s daily work.

• If a signature machine is used to issue money orders,

determine if the number of money orders issued is

reconciled daily. The dollar amount issued should also be

reconciled daily by an employee.
Appendix 8A -- Internal Control Checklist: Cash

The following checklist is designed to assist you to review internal controls and

identify any weaknesses. You may find additional guidance in the “AICPA’s Audits of

Credit Unions and/or Credit Union Audit Manual.”

Test Procedure Yes No

Change fund (cash-on-hand) - Internal Control Checklist.

1. Does each teller have

his own cash drawer?

Determine this by inquiry during the cash

count.

2. Does each teller have

bait money?

Determine this during the cash count.

3. Are spare keys for

cash drawers under a

system of dual control?

Review internal controls with individuals

responsible for the change fund during the

cash count. Access to spare keys must be

authorized by at least two individuals.

4. Is there a system to

identify the transfer of

funds from the vault to

individual tellers?

Review this with the tellers by inquiry during

the cash count.

5. Is a change fund limit

in place for the tellers,

the vault and a total for

each office?

Determine whether a written change fund

policy includes limits for the teller and vault

change fund.

6. Do teller transaction

receipts identify the

teller who performed

the transaction?

Determine whether transaction receipts

include a teller identification number.

7. Is the change fund

balanced daily with the

general ledger?

Review the change fund records which

compare teller and vault end-of-day totals

with the general ledger balance. Tellers

should balance cash daily.

8. Does a written cash

over and short policy

exist?

Review with management. The policy

should include dollar and frequency limits

concerning cash over and short differences.

The policy should address disciplinary

action.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-2

9. Is a log kept to track

the cash over and

short records for

individual tellers?

Review with management.

10. Does someone

complete periodic

surprise cash counts?

Determine if the supervisory committee,

management employee, internal auditor or

outside auditor completes random cash

counts monthly or quarterly. Teller, vault

and ATM change fund accounts should be

in the scope of the surprise cash counts.

11. Do adequate

safekeeping facilities

exist for cash?

Ensure the amount of cash kept on hand in

the safe or vault is adequate relative to the

credit unions operational needs. Additional

guidance is available from the surety bond

company.

12. Are tellers prohibited

from processing their

own and related party

transactions?

Tellers should not process transactions on

their own accounts. Tellers should not

process transactions for relative’s accounts.

Check to see if the computer system limits

employee access to their own accounts and

relative’s accounts.

13. Are tellers required to

deposit checks

received at the end of

the day?

Check to see if checks received during

each day are kept in the end-of-day check

deposit. Tellers should not hold over

checks into the following day.

14. Are member drafts

drawn on the credit

union, withdrawn

immediately?

Determine if tellers withdraw funds from the

accounts immediately for in-house drafts

presented.

15. Is management aware

of the record keeping

and reporting

requirements of the

Bank Secrecy Act?

Review whether or not compliance with the

Bank Secrecy Act and reporting

requirements for certain transactions have

been reviewed at least annually, as

required.

16. Is the ATM change

fund balanced with a

system of dual control?

Review whether two individuals routinely

are involved in the balancing and

reconciliation of ATM change fund

accounts.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-3

17. Are cash shipment

counts under a system

of dual control?

Review whether or not two individuals are

involved in the count of all cash shipments

received to verify any differences

immediately.

18. Did the cash count

balance with the

general ledger?

Compare total cash (change fund) counted

with the total reported on the effective day

general ledger.

19. Has a maximum

change fund amount

been approved by the

board of directors and

is the change fund on

hand within this limit?

Verify maximum limit in board meeting

minutes or written board policy statement.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-4

Travelers Checks And Money Orders - Internal Control Checklist.

1. Do adequate

safekeeping facilities

exist for travelers

checks and money

orders?

Determine whether access to safekeeping

facilities for travelers checks and money

orders is limited to as few individuals as

possible.

2. Is a log or adequate

subsidiary record kept

for the travelers checks

inventory?

Review the log of travelers checks and

money orders. Such a log must include:

travelers check serial numbers, denominations, and quantity. The credit union

should maintain the inventory in sequential

serial number order.

3. Does someone

complete a surprise

inventory of travelers

checks?

Review segregation of duties: usually one

or two individuals are responsible for the

travelers checks log; someone other than

the primary individuals should complete an

inventory monthly or quarterly.

4. Is the inventory of

travelers checks

reasonable in relation

to needs?

Review the total inventory in relation to

actual sales patterns to determine

reasonableness. The travelers check

inventory should not be excessive.

5. Is the travelers check

settlement general

ledger account activity

posted and reconciled

by an individual who

does not have access

to the travelers

checks?

Review the travelers check settlement

account reconciliation procedures noting

the importance of proper segregation of

duties. This may help to prevent

inappropriate activity and unauthorized use

of travelers checks.

6. Is the money order

settlement general

ledger account activity

posted and reconciled

by an individual who

does not have access

to the money orders?

Review the money order settlement account

reconciliation procedures noting the

importance of proper segregation of duties.

This may help to prevent inappropriate

activity and unauthorized use of money

orders.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-5

7. Did the travelers

checks count balance

with the credit union’s

log or subsidiary

record?

Compare total travelers checks counted

with the records maintained by the credit

union to track total travelers checks.

8. Did the written

confirmation received

from the travelers

checks company agree

with count completed

for the audit?

Compare the written confirmation received

with the inventory sheet. Investigate any

significant difference.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-6

Cash in Bank - Internal Control Checklist.

1. Are bank deposits

prepared by an official

or employee who does

not serve as a teller?

Check for proper segregation of duties in

the preparation of bank deposits by

reviewing staff assignments: bank deposit

preparation hopefully separate from teller

functions.

2. Are bank deposits

made intact within the

time limits prescribed in

the FCU Bylaws?

Ensure deposits are made within proper

time limits -- The bylaws require deposits to

be made no later than the second banking

day after their receipt. Intact deposits refers

to all cash and checks received in the

period are deposited together.

3. Are all check signers

authorized by the

board of directors?

Review a current list of all employees and

officers authorized to sign checks.

Determine whether internal controls prevent

check signers from also posting

transactions to the general ledger.

4. Are authorized check

signers prohibited from

signing checks payable

to themselves?

Determine if internal controls protect

against check signers signing a check

payable to themselves. This is

recommended for proper segregation of

duties.

5. Are all expenses

properly approved

before payment?

Review a sample of supporting documents.

6. Are invoices and bills

marked paid with the

date of payment to

avoid duplication of

payment?

Review a sample of paid bills.

7. Are voided checks

properly marked and

retained?

Determine whether voided checks are

marked to prevent unauthorized use.

8. Are bank

reconcilements

prepared promptly

each month by persons

not directly involved in

handling cash or the

Recommended for proper segregation of

duties.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-7

accounting records?

9. Does the supervisory

committee, internal

auditor, or other

management

employee periodically

review bank account

reconcilements?

Determine the frequency with which, and

the responsible party who, periodically

reviews bank account reconcilements.

These are recommended quarterly to

strengthen internal controls.

10. Does management

notify the credit union’s

banks, as soon as

possible, when an

authorized individual

on the account has

resigned or is no

longer an authorized

user?

Review this with management.

11. Is board of director

approval required prior

to opening a bank

account?

Review this with management.

12. Are reconciling items

on the bank

reconcilement cleared

in a reasonable time

frame?

Determine the timeframe it takes for

reconciling items to clear the bank

reconcilement. All reconciling items must

include a reference date. Items outstanding

over sixty days are a cause for concern and

must be investigated.

13. Is a procedure in place

to follow up on checks

which are outstanding

more than ninety days?

Determine if a procedure is in place to

ensure checks clear timely and to

investigate why long term outstanding

checks do not clear in a reasonable time

frame. Checks that do not clear within

ninety days should be investigated and

transferred to an accounts payable account.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-8

14. Does a policy limit exist

for the maximum

amount of cash which

may be deposited in a

particular bank

account?

Determine whether or not tThe amount on

deposit/average daily balance isshould be

reasonable in relation to needs.

15. Does management

evaluate financial

institutions with

balances over insured

amounts?

Determine if a review of the financial

condition of the institution is completed at

least annually. Annual reports and financial

statements should be on file to document

this review.

16. Are check signing

machines and/or

stamps locked in a

secure place to prevent

unauthorized use?

Verify security exists and is adequate.
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-9

Wire Transfers - Internal Control Checklist.

(This checklist is designed for a general review of wire transfer internal controls.

You should refer to more comprehensive materials to review internal controls for

credit unions with Fedwire terminals.)

1. Are individuals properly

authorized to complete

transfers?

Review the policy to determine.

2. Is there a written policy

which details

instructions.

Review the policy to determine.

3. Are there written

agreements with the

members who request

wire transfers?

Determine if written agreements with

members authorizing wire transfers are

signed by the member and if they include a

section detailing the credit union’s liability.

4. Is there a written

agreement with the

financial institutions for

wire transfers?

Determine if an agreement with all financial

institutions for wire transfers used is be on

file.

5. Are financial

institutions notified of

credit union personnel

changes?

Determine if the financial institution is

notified of personnel changes to prevent

unauthorized wire transfers.

6. Are bank accounts with

wire transfer activity

reconciled by

individuals who do not

initiate transfers?

Recommended for proper segregation of

duties.

7. Are the number of

employees approved to

complete a wire

transfer kept to a

minimum?

Determine if the credit union has limited the

number of employees approved to complete

a wire transfer (review in relation to total

employees).
Appendix 8A -- Internal Control Checklist: Cash

Test Procedure Yes No

8A-10

8. Are wire transfer duties

given to employees

with higher seniority?

Determine if this is normally done. In

general, new employees should not be

given wire authority. An employee

background check should be completed

prior to assigning wire authority.

9. Are sufficient

segregation of duties in

place to prevent an

employee from

processing an entire

wire transfer

transaction without

intervention from

another employee?

Determine if internal controls are in place to

prevent this problem and document them.
WORKPAPER INSTRUCTIONS

Appendices - Chapter 8

Appendix 8B -- Cash In Bank Account Work Paper Instructions

Cash In Bank Account Reconcilement.

How do we

complete the

review of the

cash in bank

account

reconcilement?

You may photocopy the credit union’s reconcilement for use in

testing. You may use the Cash In Bank Account Reconciliation

Form sample provided.

Follow the audit procedures for cash in bank, which are detailed in

Chapter 8.

Review or complete a bank reconciliation for all cash in bank

accounts on the general ledger. If an in-house draft account is

used as the credit union’s checking account, be sure to include

the account(s).

How do we

confirm cash in

bank accounts?

Use the sample bank confirmation form provided. Send a

confirmation to all cash in bank accounts as of the audit date.

Include a stamped self addressed envelope for the reply.

The confirmation must be returned directly to the supervisory

committee for review.

Review the bank confirmations received and compare the

confirmed bank balance with the balance used on the bank

reconciliation. Investigate any differences noted on the bank

confirmation when comparing back to credit union records.
BANK ACCOUNT RECONCILEMENT

Credit Union: 

Name of Bank: Audit date:

G.L. Acct. No.: Reconcilement date:

 

A. BALANCE PER GENERAL LEDGER:

1. Additions: (Items added by bank but not yet entered on books of the credit union)

date description amount

Total additions: 0.00

2. Deductions: (Items added by bank but not yet entered on books of the credit union)

date description amount

Total deductions: 0.00

Adjusted General Ledger Balance: 0.00

B. BALANCE PER BANK STATEMENT:

1. Deductions: 

Total Outstanding Checks: (enter total from Section D) 0.00

Other deductions:

date description amount

Total deductions: 0.00

2. Additions: (Items added by credit union but not yet entered on the bank's records)

G.L. date description Bank CR date amount

Deposit in transit

Total additions: 0.00

Adjusted Bank Balance: 0.00

C. RECONCILIATION:

Book Balance (from Section A) 0.00

Bank Balance (from Section B) 0.00

Out-of-balance Condition (if any) 0.00
D. OUTSTANDING CHECK LIST:

Check no. Amount Check no. Amount
WORKPAPER INSTRUCTIONS

Appendices - Chapter 8

Appendix 8C -- Reconciliation Of Receipts To

Deposits Work Paper Instructions

Reconciliation of receipts to deposits.

How do we

complete the

reconciliation of

receipts with

deposits?

Refer to the sample form Reconciliation Of Receipts With

Deposits. The purpose of the reconciliation is to trace the bank

deposits recorded on the general ledger (debits to cash in bank)

with the deposit credits on the bank statement or a validated bank

deposit receipt.

• Review the general ledger date of the deposit with the date

of the bank credit.

• Deposit credits on the bank statement or deposit receipt

should be dated within one to two days of general ledger

debit.

• Investigate any differences when comparing the general

ledger debit with bank credits.

• Complete a reconciliation of receipts with deposits for all

general ledger accounts in which cash is deposited.

What is the

testing period for

the receipts with

deposits test?

The recommended period for review is the month of the audit date

through the date of the cash count. For example, if the audit date

is December 31, and the cash count took place on January 15,

the receipts with deposits test should be completed for the period

of December 1 to January 15. The purpose of the test check is to

ensure that deposits are made intact and on time, within the

provisions for the FCU Bylaws. Undeposited amounts should be

properly secured and reconciled.
RECONCILIATION OF RECEIPTS WITH DEPOSITS

Credit Union:

Name of Bank: Audit date

G.L. Acct. No.: Reconcilement date

Daily Receipts: Bank Deposits:

(debits to Cash in G.L.) (credit entries on bank statements)

Entry Date Amount Entry Date Amount Difference Comments

5/5/96 111.20 $ 5/6/96 111.22 $ (0.02) $ 

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

Totals: $ 111.22 111.20 $ (0.02) $ 
SAMPLE CONFIRMATIONS

Appendices - Chapter 8

Appendix 8D -- SAMPLE CONFIRMATION FOR CASH IN BANK

___________________________

___________________________

___________________________

___________________________

___________________________

___________________________

Date_________________

Re: Bank account no.________________

Dear Sir or Madam:

The supervisory committee of the ________________ Credit Union is conducting an audit

of the books and records. Please confirm any balances for the account number listed

above, as of ____________. A stamped self addressed envelope is enclosed for your

reply. Please respond directly to the Supervisory Committee. Thank you in advance.

Sincerely,

__________________________

Supervisory Committee member,

_______________ Credit Union

Authorized signature:

__________________________

Manager/CEO

_______________ Credit Union

Please provide balance information, as of ____________________:

Checking account balance $____________________

Savings account balance $____________________

Federal Funds balance $____________________

Other account balance $____________________

Loan or note payable balance $___________________

Line of credit borrowing limit $___________________

Collateral held for credit union liabilities: $___________________

Safekeeping - securities held: $___________________

__________________________ ____________________ ____________

Bank employee signature Title/position Date
WORKPAPER INSTRUCTIONS

Appendices - Chapter 8

Appendix 8E -- Cash Count Work Paper Instructions

Cash count

When is the best

time to complete

a cash count?

The cash count must be completed on a surprise basis for an

effective cash count. Do not notify management and staff with the

date and time of the count.

It is best to complete a cash count in the morning, before the

credit union opens for business.

It is preferable to count the teller change fund before any

transactions take place. If the count takes place before any

transactions are processed, then the main part of the count will be

to count the currency and coin.

If the cash count takes place after the teller posts transactions,

then all of the transactions must be summarized to balance the

drawer. It will take more time to complete the count.

In order to balance back to the general ledger and teller proof

sheet:

• Checks and money orders received must be added.

• Cash withdrawal transactions must be summarized and

included on the cash count sheet.

The vault cash should be counted before any transfers are made

from the vault to the tellers.

How do we

complete the

cash count

sheet?

A separate cash count sheet must be completed for each teller,

vault, and any automated teller machine (ATM’s) owned. After

counting all cash and cash items (if applicable), total the cash

count sheet and compare the total amount with the teller proof

sheet (usually a balancing sheet generated by the computer

system).

Investigate any difference noted with the cash count total and the

required change fund amount from the proof sheet.
WORKPAPER INSTRUCTIONS

Appendices - Chapter 8

During the count, ask the teller if the drawer or vault contains bait

money (pre-recorded money set aside in case of a robbery).

The teller signs the cash count sheet when the count is

completed. You sign the cash count sheet when the count is

completed.

How do we

balance the cash

counted to the

general ledger?

You must be certain that all teller and vault change funds were

counted. Complete the change fund recap, which summarizes

the funds counted. Total all of the individual teller and vault

funds.

Compare the total cash counted with the effective date of the

respective general ledger account balance. Investigate any

significant differences. Include any significant difference in the

audit report to the board of directors.
CASH COUNT

Credit Union: Audit date:

Teller name/no. Cash count date:

A. Coins: Number of: loose rolls Total

Pennies 1 1 0.51 $ 

Nickels 1 1 2.55 $ 

Dimes 1 1 5.10 $ 

Quarters 1 1 10.25 $ 

Halves 1 1 10.50 $ 

Dollars 1 1 21.00 $ 

$ 49.91

Currency: Number: Total

Ones 1 # $ 1.00

Twos 1 # $ 2.00

Fives 1 # $ 5.00

Tens 1 # $ 10.00

Twenties 1 # $ 20.00

Fifties 1 # $ 50.00

Hundreds 1 # $ 100.00

$ 188.00

Other items: Mutilated currency 1.00 $ 

Stamps 1.00 $ 

Tickets 1.00 $ 

$ -

$ 3.00

Bait money: $ 1.00

Undeposited checks and money orders * $ 12,345.00

TOTAL CASH, CASH ITEMS, AND CHECKS: $ 12,586.91

B. LESS: General Ledger Change Fund Balance: $ 150.00

C. LESS: Undepositied checks and money orders: $ 12,345.00

D. DIFFERENCE - cash (short) or over: 91.91

I hereby certify that funds shown on the "TOTAL CASH, CASH ITEMS, AND CHECKS" line were counted

by____________________________________ for the supervisory committee in my presence

this __________ day of _________, _________ at (a.m., p.m.) and returned to me intact. These

funds represent all funds of the credit union for which I am accountable. If there is a cash short

or over condition noted, I agree with the difference.

______________________________ ________________________________________________

Credit union employee - signature Counted by supervisory committee representative - signature
Appendix 8F -- CHANGE FUND RECAP FORM

Federal Credit Union

Change Fund Recap

Date of cash count:

Audit date:

 Difference

Teller no. Cash counted Change fund amt Over or (short)

1 4,900.00 $ 5,000.00 $ (100.00) $ 

2 5,000.00 $ 5,000.00 $ - $ 

3 5,000.00 $ 5,000.00 $ - $ 

4 5,000.00 $ 5,000.00 $ - $ 

5 5,000.00 $ 5,000.00 $ - $ 

6 50,000.00 $ 50,000.00 $ - $ 

Totals 74,900.00 $ 75,000.00 $ (100.00) $ 

Balance 

per G.L. 75,000.00 $ 

Difference (100.00) $ 

Compare total cash counted with the respective general ledger account

balance for the effective date of the count.

If there is a significant difference between the change fund counted and 

the general ledger balance, include this in your audit report.

File: chptr8.xls
WORKPAPER INSTRUCTIONS

Appendices - Chapter 8

Appendix 8G -- Travelers Checks Work Paper Instructions

Travelers checks count.

How do we

complete the

travelers checks

count?

You use the travelers checks inventory form, a sample form is

included. List the starting and ending serial numbers for each

pack of travelers checks. Write down the number of travelers

checks in the set. Write down the denomination of the travelers

checks, usually $20, $50 or $100. Write down total dollar amount

in the series of travelers checks counted.

After counting the travelers checks inventory, compare the total

counted with the total on the credit union’s subsidiary record or

log. Investigate any difference noted on the confirmation reply

letter.

How do we

confirm the

travelers checks

inventory?

After the count is reconciled, complete the travelers checks

confirmation. Include a copy of the travelers checks inventory with

the confirmation. Include a stamped self addressed envelope for

the reply.

The confirmation must be returned directly to the supervisory

committee for review.

Review the confirmation from the travelers checks company and

research any differences noted in the confirmation reply.
TRAVELERS CHECKS INVENTORY

Credit Union:

Name of Issuer: Audit date

G.L. Acct. No.: Count date

Serial Numbers Number of 

Checks Denomination Total Dollar 

Value

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

TOTAL $ amount counted: - $ 

Inventory summary:

Total amount counted: - $ 

Total per credit union log/records:

Difference: - $ 

I certify that the above listed travelers checks were counted by ______________________

for the supervisory committee on __________________ and they were returned to me intact. 

These are the travelers checks for which I am accountable. If there is any difference noted, I 

agree with this amount.

___________________________ ________________________________________

Employee signature Supervisory Committee Representative Signature
SAMPLE CONFIRMATIONS

Appendices - Chapter 8

Appendix 8H -- SAMPLE TRAVELERS CHECKS CONFIRMATION

___________________________

___________________________

___________________________

___________________________

___________________________

___________________________

Date_________________

Account no.________________

Dear Sir or Madam:

The supervisory committee of the ________________ Credit Union is conducting an audit

of the books and records. Please confirm the attached copy of the travelers checks

inventory as of ________________. Please detail any differences noted. A stamped self

addressed envelope is enclosed for your reply. Please respond directly to the Supervisory

Committee. Thank you in advance.

Sincerely,

__________________________

Supervisory Committee member,

_______________ Credit Union

Authorized signature:

__________________________

Manager/CEO

_______________ Credit Union

_________________________________________ ____________________

Signature - Representative of travelers checks company Date
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 9 -- HOW DO WE AUDIT INVESTMENTS?

9.01 To help us get started, could you provide us some background on

investment assets?

9.02 What are our audit objectives?

9.03 What are our audit procedures?

9.04 How do we test internal controls?

9.05 How does management classify investments?

9.06 How do we verify the accuracy of the general ledger accounts?

9.07 How do we verify investment accounts with supporting records?

9.08 How do we verify the balances listed on the investment report?

9.09 How do we review the premium or discount?

9.10 How do we determine whether accrued income is reasonable?

9.11 How do we confirm the ownership and existence of investments?

9.12 How do we verify the accuracy of the investment fair value section on

the financial statements?

9.13 How do we verify the accuracy of the investment maturity breakdown on

the financial statement?

9.14 What do we need to document?

9.15 What if we determine through testing that internal controls are not

working as intended?

Appendices

9A Internal Control Checklist: Investments

9B Investment Control Worksheet Instructions

Investment Control Worksheet

9C Standard Investment Confirmation

9D Securities Confirmation

9E Broker Account Confirmation
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-2

To help us get

started, could

you provide us

some background on

investment

assets?

9.01 Investments are used as a temporary vehicle to hold

excess funds and as part of an overall asset/liability management

strategy. A certain amount of funds needs to be readily available

for share withdrawals, loans, and operating expenses. Usually

the credit union will have a deposit account, such as at the

corporate, to hold immediately available cash. Other investments

are held with staggering maturities to provide funds on an ongoing

basis. If the credit union’s loan demand is low, management may

choose to invest the member’s shares.

Types of Investments. The credit union’s investment portfolio

may contain a variety of investment instruments. A few of the

more common investments are:

a) A deposit account. There are no restrictions for withdrawals,

e.g., the credit union’s checking account. This is the most

readily available source of funds.

b) A certificate of deposit. These investments are normally

purchased from local banks or other financial institutions and

mature on a specified date. There is usually a substantial

penalty for withdrawing the funds early.

c) Federal Funds. “Fed funds” are overnight deposits. Funds

are normally taken from an account at the end of the day,

and credited back the next morning. The purpose of the

transaction is to provide additional interest income to the

credit union.

d) US Treasury Securities. The U.S. Government issues and

fully guarantees these investments. Treasury issues include

bills, notes and bonds. US Treasuries have a specific

maturity date, ranging from 3 months to 30 years.

e) US Agency Securities. These investments are issued by

agencies of the federal government, e.g., Freddie Mac,

Fannie Mae, and Sallie Mae. They are backed by different

collateral, depending on the agency that issues them.

Accounting for these investments depends on the collateral

involved, and the way it was purchased.

f) Other Investments. There are many other investments in
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-3

which credit unions can invest. Some investments are not

allowable for credit unions. Other investments, including

derivatives of #d and #e above, are beyond the scope of this

guide. Your committee should refer to the AICPA Credit

Union Audit Manual, the AICPA guide for Audits of Credit

Unions, or an outside accountant for assistance in these

cases.

Obtaining Investments. Credit unions purchase investments

from different sources:

• Directly from the provider. Of course, the credit union works

directly with the provider for deposit accounts. Certificates of

deposit can be made directly with the issuing institution.

U.S. Treasury securities can be purchased directly from the

U.S. Treasury.

• Through a broker. Certificates of deposit, US Treasuries,

and Agency securities can be purchased through a broker.

The documentation that you review will differ from that

provided directly from the issuer.

What are our

audit objectives?

9.02 Your audit objectives are:

a) Determine whether internal controls over investment

transactions are adequate.

b) Verify that management classifies securities when acquired

as either held-to-maturity, available-for-sale or trading.

c) Ensure that management has properly recorded and

reported investments, related accounts, and fair values.

• Verify that management has recorded all investments

owned, and related investment transactions in the

appropriate period.
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-4

• Verify that management has recorded and reported

realized and unrealized gains/losses, accrued income,

investment income, and unamortized premiums/discounts

appropriately.

d) Verify the ownership and existence of the investments.

Verify that investments are either on hand, or held in

safekeeping.

e) Determine compliance with NCUA Rules and Regulations

and credit union board policy.

What are our

audit

procedures?

9.03 Your audit procedures are:

a) Test the internal control structure surrounding investments to

identify any internal control weaknesses.

b) Determine how management classified investments.

c) Verify the accuracy of the general ledger investment and

related accounts.

d) Confirm the ownership and existence of the investment.

e) Verify the accuracy of the investment fair value and maturity

sections of the financial statements.

.

How do we test

internal controls?

9.04 You will need to review board minutes to determine the

extent of the board’s involvement, and review the board’s

investment policy. Complete the internal control checklist

accompanying this chapter. You will obtain your answers from

discussions with staff and observation. You should verify this

information throughout your investment review as you look at the

supporting documentation.

If there are material weaknesses in the internal control structure,

you should complete the review on ALL investments. Your audit
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-5

report should include findings on internal control weaknesses

when it is feasible for the credit union to revise practices to

strengthen them. You should confirm ownership of ALL

investments.

Due to the limited control structure of credit unions with small

staffs (i.e., less than 5 employees), committee members must

apply procedures for all investments.

How does

management

classify

investments?

9.05 With regard to investment securities, management must

assess its intent and ability with regard to the securities. Based

on this assessment, management must classify securities as

either “Held to Maturity” (HTM), “Available for Sale” (AFS), or

“Trading." An extensive discussion of trading securities is beyond

the scope of this guide. Deposit accounts, certificates of deposit

(for the most part), and fed funds are not securities and

management should not classify these in any of the three

categories.

HTM. The HTM classification signifies that management intends

to hold the investment until it matures. The value should be

adjusted for the amortization of premiums or discounts on the

credit union’s records. The balance of the investment account

should tie to the original supporting documentation or a supporting

record of amortization.

AFS. The AFS classification signifies that management will sell

the investment if they need the funds for other purposes. In this

case, they should adjust the investment account to fair value on a

periodic basis. You will verify the balance of AFS investments by

tying to the fair value of the investment, and reviewing the account

history.

Management should evaluate the classification, with any

necessary adjustments of fair value recorded, at least every

dividend period.
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-6

How do we verify

the accuracy of

the general

ledger accounts?

9.06 While completing these tests, remember to also review for

compliance with board policy and your assumptions on internal

controls:

a) Verify the accuracy of the general ledger accounts with

detailed subsidiary records. Subsidiary records may include

broker statements, manual ledgers, computer generated

worksheets, etc. Include:

• Investments.

• Premiums/Discounts.

• Accrued Income.

b) Verify the accuracy of the detailed subsidiary records, and

any other documentation maintained by management.

c) Review history on premiums/discounts, if any, and verify that

amortization periods are reasonable.

d) Review the accrued interest on a sample of investments for

reasonableness.

How do we verify

investment

accounts with

supporting

records?

9.07 You should verify investment general ledger accounts by

tracing amounts to subsidiary records, as follows:

a) Obtain a detailed investment report. If the credit union does

not have a detailed list of investments, developing your own

report will facilitate and support your review. We included a

sample in the appendix to this chapter.

b) Total the balances on the list, and tie the results to the

corresponding general ledger accounts as listed on the trial

balance. Complete this review on the investment balances

and any other applicable accounts--premiums/discounts and

accrued income.
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-7

How do we verify

the balances

listed on the

investment

report?

9.08 Once you verify that general ledger accounts equal the

balances on your investment list, you should verify that the

supporting records are accurate. Complete the following steps:

a) Choose a sample of investments from your investment report

to tie to supporting documentation, if investment internal

controls are adequate. Select every “Nth” investment. You

should review at least a few investments purchased since

the prior audit. If your internal control review indicated weak

controls, you must review the entire investment portfolio.

b) Request that management provide you with the supporting

documentation for all investments (“investment files”). Even

if you selected a sample, you should obtain the address for

the confirmations directly from supporting documentation.

c) For all DEPOSIT accounts, tie the balance of the account

directly to the month end statement from the issuer. If these

amounts do not directly correspond, refer to Chapter 8, the

“How Do We Audit CASH?” chapter for directions on

reviewing reconcilements.

d) For FED FUND accounts, documentation to support these

deposits varies. Trace the balance on the general ledger to

any support for the account, and ensure that the interest

recorded for these investments is reasonable. Be sure to

confirm all fed funds accounts, as indicated in the following

paragraph.

e) For ALL OTHER INVESTMENTS, trace the following from

your report to the supporting documentation:

• Amortized cost--If the investment is depository in nature, or

is classified as HTM.

• Fair value--If AFS or trading, trace to the current fair value.

• Maturity.

• Stated rate.
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-8

• Original premium/discount.

If purchased from a broker, ensure that the board has

authorized use of the broker in the investment policy.

You could complete the investment confirmations using the

addresses listed in the file during this review. You need

send only one confirmation request to a broker that sold the

credit union more than one investment.

f) What if the balance of the federal agency security doesn’t tie

to the broker’s confirmation? Most federal agency securities

pay back principal throughout the life of the investment.

• Review the history or management’s detailed subsidiary of

the investment account to ensure that it appears

reasonable. You should see reductions in the principal

amount of the investment.

• Trace a small sample of these principal payments to

supporting documentation (management should have

copies of the checks received in the file, along with support

for the entry made when they received the check).

Refer to the workpaper instructions for additional clarification on

completing the above steps. See Appendices 9C, 9D, and 9E for

sample confirmations.

How do we

review the

premium or

discount?

9.09 Premiums or Discounts. When an investment has an

interest rate that is higher or lower than market rates, a broker will

compensate for the difference in yield by adjusting the price of the

investment. If the stated interest rate is higher than the market

rate, the credit union will pay more than the stated value. In this

case, management purchased the investment at a “premium." If

the stated interest rate is lower than market, you will not pay full

price for the investment. Management would purchase it at a

“discount." The credit union should write-off the premium or
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-9

discount over the life of the investment. The Accounting Manual

for Federal Credit Unions discusses the proper accounting

treatment for premiums and discounts.

Steps. If the premium or discount is material:

a) Obtain a history of the amortization of the premium or

discount. Management may have maintained a separate

record of the account, or you may need to review the general

ledger history. Ensure that the history is reasonable. If the

credit union maintains a separate subsidiary, ensure that the

ending balance corresponds with the general ledger balance.

b) Review the amortization period used, and compare to the

investment to ensure that the write-off period is reasonable.

How do we

determine

whether accrued

income is

reasonable?

9.10 You should complete the following steps to verify accrued

income:

a) Review the investment for interest payment patterns to

determine at what point the security last returned interest.

How many months of interest have been earned but not

paid?

b) Determine the annual interest the investment should pay,

and convert this figure into the period determined in #a

above.

c) Compare this figure with the income that the credit union

accrued for the investment. The balances should be similar.

d) Do payment patterns correspond with the payment schedule

indicated on the investment?

How do we

confirm the

ownership and

existence of

9.11 You should send confirmation notices to holders of all of

the credit union’s investments. Complete the following steps:

a) Complete a “Confirmation Notice” for ALL of the credit

union’s
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-10

investments?

investments. Refer to the appendices to this chapter for

example forms. Use the addresses taken from the

independent documentation in the files (someone could

easily change addresses on the credit union’s records).

b) Mail the form directly to the institution. Do not use staff to

assist you in this process.

c) Check off the investments on your investment report as the

confirmations come back.

d) Review the confirmation for any discrepancies.

e) Research differences thoroughly to obtain an adequate

explanation. The difference may simply be a result of timing

or a simple error. You should immediately bring material,

inadequately explained differences to the board’s attention.

f) One to two weeks after you mailed the confirmations, review

your investment report for any confirmations that you haven’t

received. Send second notice requests to the institutions.

Repeat this process again if institutions haven’t returned

confirmations. As a last resort, call any institutions from

which you still haven’t received confirmations.

How do we verify

the accuracy of

the investment

fair value on the

financial

statements?

9.12 Financial statements should footnote fair values of the

entire investment portfolio. You should verify the accuracy of

these figures by completing the following steps:

a) Complete the fair values section on your investment report.

b) Trace the fair values to management’s supporting

documentation. Management may use a statement obtained

from the broker, a newspaper such as the Wall Street

Journal, or other recognized information provider. Contact a

broker or other information provider to verify values if they

appear unreasonable or you cannot obtain the information

from management.
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-11

c) Total the fair values on your investment report by investment

category, and use this figure to verify the balance listed on

the financial statement.

How do we verify

the accuracy of

the investment

maturity breakdown on the

financial

statement?

9.13 The financial statements should categorize investments by

maturity (usually “Less than one year” and “Over one year”). You

should verify that management has accurately reported maturities

by completing the following steps.

a) Total all investments for each investment type on your

investment report that have a remaining maturity of less than

one year. Use fair value for all AFS investments, and

amortized cost for all remaining investments.

b) Determine the amount remaining for all other maturity and

type categories.

c) Verify that management used these figures for the financial

statements.

What do we need

to document?

9.14 Document ALL of your reviews. You need to provide

evidence that you reviewed all necessary areas. At a minimum,

retain copies of all confirmations and any follow-up

correspondence, copies of worksheets used in the review, and the

completed internal control checklist (Appendix A).

What if we

determine

through testing

that internal

controls are not

working as

intended?

9.15 You may note during a more in depth review of the

investment area that internal controls are not working as intended.

You should:

a) Take another look at the internal control questionnaire to

determine if the noted weakness is material.
Supervisory Committee Guide

HOW DO WE AUDIT INVESTMENTS?

Chapter 9

9-12

b) If the weakness is material, you should revise your

investment review to include additional testing.
Appendix 9A -- Internal Control Checklist: Investments

The following checklist is designed to assist you to review internal controls and

identify any weaknesses. You may find additional guidance in the AICPA’s “Audits of

Credit Unions” and/or “Credit Union Audit Manual.”

Internal Controls:

Test Procedure Yes No

1. Is the board’s

investment policy

sufficient to safeguard

assets?

Review the board’s policy for authorization

of the person making the investment, types,

maturity limits, dollar limits, approved

brokers, etc. Policy should provide a

structure for safe investment practices.

2. Is management

complying with the

policy?

Briefly scan investment reports. Test for

this control during your substantive tests.

3. Does the board review

investment

transactions?

Verify that the board incorporates

investment transaction reviews into the

monthly board minutes. This serves to

increase awareness and assures that the

board monitors activity.

4. Do investment reports

include enough detail

to appropriately inform

the board of potential

risks involved?

Determine if the reports include a sufficient

description of the investment, unrealized

market loss (on agencies, treasuries),

maturity, yield, and investment activity.

5. If management uses

brokers, does the

board evaluate them?

Determine if management has reviewed the

broker’s financial condition, reputation, and

insurance. The credit union should also

have a signed account agreement.

6. Does the board

approve investment

and related account

write-offs?

Verify that the board approves all write-offs

(for example, loss of interest, premium

write-off, other-than-temporary decline in

market values, etc.). Routine adjustments

to fair value do not require approval from

the board of directors.
Appendix 9A -- Internal Control Checklist: Investments

Test Procedure Yes No

9A-2

7. Does the internal

auditor or another

independent party

conduct their own

investment reviews?

Review and follow-up of authorization,

existence, appropriateness, classification

and record keeping reduces the risk of

inappropriate activity and errors. (You

should review their documentation.)

8. Does a committee or

an individual make

investment decisions?

Determine who makes investment

decisions. Delegating decisions to a

committee, rather than an individual,

reduces the risk of poor or inappropriate

decisions. Board policy should specifically

define their authority, and it should be

reasonable.

9. Does the board

delegate investment

decisions to a broker or

investment service?

Examine board delegations. Management

should research the investment service

prior to use and always require a written

contract. The contract should provide clear,

appropriate limits to reduce risk.

10. Who has management

authorized to redeem

investments?

Determine if a separation of duties exists.

Persons with access to the investments

should not post to or reconcile the

investment records. This separation exists

to prevent unauthorized access to

investment funds without immediate

detection.

11. If the credit union

purchases investments

from brokers, are the

investments in

safekeeping with a

third party?

Determine where investments are safekept.

Having another institution hold investments

ensures that the broker will not use the

investments to his advantage.

12. Does staff use a safety

deposit box or vault for

investments?

Do two credit union staff persons jointly

access the safety deposit box? This

reduces the risk of unauthorized removal,

as it requires involvement from both

employees.
Appendix 9A -- Internal Control Checklist: Investments

Test Procedure Yes No

9A-3

13. Is the credit union

recorded as the owner

of the investment?

Verify. All investments made directly with

the issuing entity should be in the credit

union’s name. A broker should at least hold

the investments for the credit union's

account.

14. Does management

analyze market

values?

Determine if staff retain market value

quotations (preferably using an

independent source), and disclose these on

the financial statements.

Accounting Procedures:

1. Are investments

appropriately

classified?

Investigate investment classification (Held

to Maturity or Available for Sale), to

determine the correct figures to use when

verifying general ledger balances.

2. Are the investment

general ledger

balances accurate?

Trace general ledger balances to

appropriate documentation, such as

safekeeping receipts.

3. Are related general

ledger balances

accurate?

Trace supporting accounts to appropriate

detail, or verify that they are reasonable if

there is no support. Verify accrued income,

premiums/discounts, Unrealized Gain/Loss

account.

4. Do investors confirm

that the credit union

owns the investment?

Send confirmation notices for ALL

investments. Track confirmations as you

receive them to verify that all are returned

and support the general ledger balances.

5. Are investment market

values and maturity

classifications on the

financial statements

accurate?

Verify with supporting documentation.
Appendix 9B -- Instructions for Sample Investment Control Worksheets

Will we need to

modify the

worksheet?

You should tailor your report to the credit union’s investment

portfolio. For example, does management purchase any

investments at a premium or a discount? If not, you do not need

this section on the investment report. If the credit union does not

accrue investment income, you do not need to include these

columns.

If management’s report does not include areas that you need, you

could modify management’s report, or develop your own to cover

only the necessary areas.

We have provided two worksheets for you to use--one related to

HTM investments, and one related to AFS investments.

What general

ledger accounts

can we verify

using the HTM

investment form?

You can use this worksheet (or a similar worksheet prepared by

management) for several different accounts. The following

numbers correspond to the numbers listed on the worksheet; keep

in mind that you may need to add some totals to the AFS

worksheet to obtain final values.

(a) The investment general ledger accounts (accounts #740

through #759) should equal historical or amortized cost for

most HTM investments, or the amortized value for

premiums, discounts, and investments that have made

principle payments.

(b) Accrued income should correspond to the accrued income

general ledger accounts (#782 series).

(c) The financial statements should footnote fair values.

What general

ledger accounts

can I verify using

the AFS

investment form?

Again, the worksheet can be used to verify several different

accounts. The following numbers correspond to the numbers

listed on the worksheet; keep in mind that you may need to use

some figures from the HTM worksheet to obtain fair values:
Supervisory Committee Guide

Workpaper Instructions

Appendix 9B

9B-2

(a) The investment general ledger accounts (accounts #740

through #759) should equal fair value. Premiums or

discounts should equal amortized historical cost.

(b) The “Accumulated Unrealized Gains/Losses on AFS

Securities” general ledger account #945 should equal the

total unrealized gain or loss figure.

(c) Accrued income should correspond to the accrued income

general ledger accounts (#782 series).
INVESTMENT WORKPAPER 

Hold to Maturity Investments

Description

Maturity 

Date

Purchase 

Date

General 

Ledger 

Balance [1]

Par Value Current 

Premium or 

Discount [1]

Accrued 

Income [2]

Market Va

[3]

The following is an example of how your audit workpaper might look when completed:CERTIFICATES OF DEPOSIT:Citibank 8/17/97 2/17/96 99,000.00 3,217.50 

First Int-Sacramento 12/22/96 12/22/95 100,810.06 100,000.00 810.06 833.33 

TOTALS 199,810.06 810.06 4,050.83 N/A

US AGENCY SECURITIES:GNMA 00395 12/15/03 6/12/96 76,523.90 N/A 596.05 3,542.17 75,12

FHLMC 3/18/97 2/14/94 80,000.00 0.00 188.90 82,00

TOTALS 156,523.90 596.05 3,731.07 157,124

US GOVERNMENT OBLIGATIONS:T-note 10/31/96 7/31/96 497,315.00 500,000.00 -2,685.00 14,583.33 498,21

T-note 3/24/99 3/24/94 150,000.00 150,000.00 0.00 3,125.00 145,91

TOTALS 647,315.00 650,000.00 -2,685.00 17,708.33 644,128
INVESTMENT WORKPAPER

Available for Sale Investments

Description

Maturity 

Date

Purchase 

Date

General 

Ledger 

Balance [4]

Par Value Current 

Premium 

or 

Discount 

[4]

Adjusted 

Value

Market 

Value [4]

Unrealized 

Gain or 

(Loss) [5]

A

In

The following is an example of how your audit workpaper might look when completed:US AGENCY SECURITIES:GNMA 00395 12/15/03 6/12/96 75,124.30 75,000.00 596.05 75,596.05 75,124.30 -471.75 

FHLMC 3/18/97 2/14/94 82,000.32 80,000.00 0.00 80,000.00 82,000.32 2,000.32 

TOTALS 157,124.62 155,000.00 596.05 155,596.05 157,124.62 1,528.57 

US GOVERNMENT OBLIGATIONS:T-note 10/31/96 7/31/96 498,210.00 500,000.00 -2,685.00 497,315.00 498,210.00 895.00 1T-note 3/24/99 3/24/94 145,918.00 150,000.00 0.00 150,000.00 145,918.00 -4,082.00 

TOTALS 644,128.00 650,000.00 -2,685.00 647,315.00 644,128.00 -3,187.00 1
Supervisory Committee Guide

Standard Investment Confirmation

Appendix 9C

(USE THE CREDIT UNION’S LETTERHEAD)

Appendix 9C -- STANDARD INVESTMENT CONFIRMATION

(DATE)

(NAME AND ADDRESS OF INSTITUTION OR SAFEKEEPING AGENT)

Dear (NAME OF AGENT):

Our supervisory committee is conducting an audit of our financial statements. In that

regard, please confirm the following investments, which our records indicate that you

held on (FINANCIAL STATEMENT DATE).

Please compare this information with your records and complete the section below

regardless of whether it agrees with your records. After signing and dating your reply,

please mail it directly to the supervisory committee in the enclosed reply envelope.

Thank you in advance for your prompt reply.

Sincerely,

(MANAGEMENT’S NAME/POSITION)

(NAME OF CREDIT UNION)

(LIST INVESTMENT(S) HERE OR PROVIDE A SEPARATE LIST. INCLUDE NAME

OF INVESTMENT, AMOUNT OUTSTANDING, AND MATURITY DATE))

The above/attached agrees with our records as of (FINANCIAL STATEMENT DATE),

with the following exceptions:

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

Signed: _____________________________________ Date ___________________

(Name and Title/Position)
Supervisory Committee Guide

Securities Confirmation

Appendix 9D

(USE THE CREDIT UNION’S LETTERHEAD)

Appendix 9D -- SECURITIES CONFIRMATION

(DATE)

(NAME AND ADDRESS OF BROKERAGE FIRM OR

SAFEKEEPING INSTITUTION)

Dear (NAME OF BROKER/SAFEKEEPING AGENT):

Our supervisory committee is conducting an audit of our financial statements. In that

regard, please confirm the following securities which our records indicate that you held

on (FINANCIAL STATEMENT DATE).

Please compare this information with your records and complete the section below

regardless of whether it agrees with your records. After signing and dating your reply,

please mail it directly to the supervisory committee in the enclosed reply envelope.

Thank you in advance for your prompt reply.

Sincerely,

(MANAGEMENT’S NAME/POSITION)

(NAME OF CREDIT UNION)

(LIST SECURITIES HERE OR PROVIDE A SEPARATE LIST. INCLUDE NAME OF

INVESTMENT, AMOUNT OUTSTANDING, AND MATURITY DATE.)

The above/attached agrees with our records as of (FINANCIAL STATEMENT DATE),

with the following exceptions:

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

Signed: _____________________________________ Date ___________________

(Name and Title/Position)
Supervisory Committee Guide

Broker Account Confirmation

Appendix 9E

(USE THE CREDIT UNION’S LETTERHEAD)

Appendix 9E -- BROKER ACCOUNT CONFIRMATION

(DATE)

(NAME AND ADDRESS OF BROKERAGE FIRM)

 Dear (NAME OF BROKER):

Our supervisory committee is conducting an audit of our financial statements. In that

regard, please send a statement of our account with you as of (FINANCIAL

STATEMENT DATE) and include:

1. Securities held by you for our account.

2. Any amounts payable to or due from us.

After signing and dating your reply, please mail it directly to the supervisory committee

in the enclosed reply envelope. Thank you in advance for your prompt reply.

Sincerely,

(MANAGEMENT’S NAME/POSITION)

(NAME OF CREDIT UNION)

The attached statement is a complete and accurate copy of all investments held with

(NAME OF BROKERAGE FIRM).

Signed: _____________________________________ Date ___________________

(Name and Title/Position)
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 10 -- HOW DO WE AUDIT LOANS?

10.01 What is our audit objective?

10.02 How do we learn about the credit union’s system of internal controls over the

lending activity?

10.03 What are some additional considerations in reviewing internal controls over

the lending function?

10.04 What audit procedures must we perform?

10.05 How do we audit record keeping?

10.06 How do we review loan policies?

10.07 How do we determine our loan sample?

10.08 How do we document our review?

10.09 Are the loan terms within policy and/or regulations?

10.10 Is the loan properly documented?

10.11 Is the borrower willing to repay the loan?

10.12 Is the borrower able to make the loan payments?

10.13 Could you discuss with us the sample workpapers appended to this chapter?

Appendices

10-A Loans Internal Control Checklist

10-B Trial Balance of Members’ Loans Workpaper

10-C Loan Review Workpaper

What is our audit

objective?

10.01 The audit of loan assets, including lending internal

controls, provides essential feedback to the credit union’s board of

directors, who must safeguard the credit union’s primary asset --

the loans to its members. Board policy should govern lending.

Policy sets the standards for adequate financial and credit history

analysis of borrowers, as well as specifying the required loan

documentation. Accordingly, you need to review loans for

compliance with policy in these three areas. You must also obtain

a reasonable assurance that loans exist and are granted to real

persons, and that loan transactions are properly recorded.
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-2

How do we learn

about the credit

union’s system of

internal controls

over the lending

activity?

10.02 Attached at the end of this chapter is a sample loan

internal control checklist, Appendix 10-A (chklst10.doc) which can

help you.

What are some

additional

considerations in

reviewing internal

controls over the

lending function?

10.03 Your review of internal controls in place over lending must

include interviewing staff and management, and reviewing board

minutes and the credit union’s procedure manuals. Specific

considerations in assessing internal controls include:

a) Environmental factors, such as:

• A well defined reporting system is in place to provide loan

information to the board of directors for their business

decisions and monitoring of lending.

• Loan policies have sufficient detail to control and

standardize loan decisions.

• Management has an on-going program of internal loan

review designed to identify problems and maintain quality.

b) Policies and procedures. The credit union should have a

sound segregation and control of duties among those who:

• Approve loans. Only properly authorized loan officers or

committees should be making lending decisions. Personnel

should analyze a member's financial ability and credit

history before he/she grants a loan.

• Control files. Loan documents should be kept in secure,

locked, fireproof cabinets. Negotiable collateral should be

under dual-access control. Management should regularly

review loan documents to ensure completeness and

accuracy.
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-3

• Receive payments. Monitoring practices must ensure that

late payments are identified and followed up, and

delinquency is properly reported.

• Post or reconcile records. Subsidiary records must be

maintained and reconciled to the General Ledger on a

timely basis. Any differences must be resolved

immediately. Management should regularly review and

approve reconcilements, and must ensure that interest

income is being properly accrued and recorded.

What audit

procedures must

we perform?

10.04 Generally, the audit procedures you perform must be

designed to:

a) Verify the accuracy of record keeping.

b) Ensure loan policies set by the board of directors are

followed.

c) Review a sample of each loan type offered.

More specifically, you must review the credit union’s system of

internal controls over the lending activity and perform audit tests

on loan receivables addressing whether:

• Loans exist at a given date and recorded transactions

occur during a given period.

• All loan transactions and accounts that should be

presented in the financial statements are so included.

• Loans are included in the financial statements at

appropriate amounts.

• Loans represent the rights of the credit union at a given

date.

• Loans are properly classified, described and disclosed.
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-4

How do we audit

record keeping?

10.05 Attached at the end of this chapter is a sample loan

review workpaper, Appendix 10-C (chptr10.xls), for this audit

step.

The general ledger control account for Loans to Members

(Account No. 701) should equal the sum of all the individual loan

accounts itemized on the credit union’s “Trial Balance of Members’

Shares and Loans.” You should report any out-of-balance

condition to the board of directors, and ensure staff begins taking

corrective action.

Some of the other key reviews include:

• Accrued interest on loans.

• Accuracy of interest being charged on members’ loans.

• Interest refunds on loans.

Accrued Interest on Loans. This area is subject to errors and/or

fraudulent transactions that can inflate or deflate the credit union’s

net income condition. The account balance represents interest

owed to the credit union but not yet collected. For example, if a

member’s loan payment arrives in mid-month, the credit union

records the interest earned up to that time, and can also accrue

the amount of interest earned-but-not-yet-collected for the last half

of the month.

Accuracy of Interest Being Charged on Loans. As a rule-ofthumb, the general ledger account balance should equal

approximately one-half the amount of loan income for a month

plus 3 months of earnings from delinquent loans.

Interest Refunds on Loans. Management will sometimes refund

part of the interest paid by members in a period in order to

distribute excess retained earnings or to stimulate loan demand.

You should recalculate refunded amounts for a sample of

members’ accounts to verify the funds are properly allocated.
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-5

How do we

review policies?

10.06 You should read the credit union’s loan policies before

selecting a loan sample or looking at individual loans. Loan

policies should exist for each type of loan offered by the credit

union and policies should address all terms, i.e., interest rate,

maturity, collateral, late fees, etc. The board of directors sets

policies to meet the needs of members as well as to control

lending. You should consider bringing to the board’s attention any

policies that seem out of touch with your sense of what other

lenders offer. When satisfied that policies are sound, you can

review loans to determine if practices follow policies. Keep in

mind that the board sets policy and can also permit exceptions.

Exceptions that arise in your loan review should be approved by

the board. If approval is delegated to staff, the board should

review and affirm exceptions at their next board meeting. Keep in

mind that the board can’t approve exceptions to statutory or

regulatory limits.

How do we

determine our

loan sample?

10.07 You should look at a random sample of each loan type

offered by the credit union. Loans typically have a “type” code

that will help you make your selection. It is important to stratify

your sample so you look at a cross-section of the total loan

portfolio. For example, although you would look at most if not all

insider loans, you might decide a suitable sample from each type

of: unsecured, automobile, credit card, delinquent, charged off,

first lien real estate, second lien real estate, and loan

concentrations in excess of $100,000. You should be aware of,

and take appropriate samples from, any “off-line” loan trial

balances such as credit cards, real estate, student loans, and

automobile leasing.

The actual number of loans you select for review of each type

depends on the size and complexity of the loan portfolio, and the

credit union’s system of internal controls. The sample size should

be based on defensible judgment. Whatever number of loans you

select for review, always look at enough loans so you are

comfortable that you understand how well lending practices

compare to loan policies. You should place special emphasis on

the following loan types:
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-6

• Real estate mortgage loans: A wide range of documents

are necessary for sound lending. Review of the appraisal

report is especially critical, an area that is often subject to

abuse leading to under-collateralized loans that may result

in eventual large losses to credit unions.

• Business loans: In addition to the specified

documentation for sound lending, be aware of the need for

ongoing awareness of loan and collateral status.

Monitoring practices should include documenting an

ongoing, periodic analysis of the business financial

condition in conjunction with inspections of the loan

collateral. (Refer to NCUA Rules and Regulations 723)).

• Construction loans: Internal controls should require

project inspections by staff in conjunction with the periodic

requests for disbursements. Similarly, disbursements

should be supported by copies of lien waivers from

subcontractors and material suppliers, which personnel

should obtain before release of funds. (Refer to NCUA

Rules and Regulations 723).

• Participation loans: Audit procedures should be similar to

that of direct loans, except you should consider confirming

the actual balances of some or all loans with the servicer.

How do we

document our

review?

10.08 Use a workpaper to record the loans you review and make

sure you review the appropriate areas. At the end of this chapter,

you will find a sample loan review workpaper (chptr10.xls) you

can copy and use, or modify to meet your special needs. Any

workpaper you use should have enough details to document that

you addressed the following questions:

a) Are the loan terms within policy and regulations?

b) Is the loan properly documented?

c) Is the borrower willing to repay the loan?

d) Is the borrower able to make the loan payments?
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-7

Are the loan

terms within

policy and/or

regulations?

10.09 When reviewing loans, you should question the approval

of any loan that exceeds the limits set by the board of directors,

such as:

• The Annual Percentage Rate (APR).

• The size of the loan.

• The repayment period.

NCUA sets some specific maximum limits on these same factors

that board policy may not exceed. If you find more than a few

such irregularities, the overall control of lending is weak and you

should report it to the board of directors. Also, loans found

outside of the legal limitations need to be corrected wherever

possible.

Is the loan

properly

documented?

10.10 You should:

• Look for a signed loan application or other evidence that

establishes the existence of the borrower, and shows that

the borrower asked for the loan. You should question

incomplete loan applications.

• Look for a signed loan note or other evidence of the legal

contract between the borrower and the credit union.

Is the borrower

willing to repay

the loan?

10.11 The loan file most often will include a recent credit report,

which is the primary tool to evaluate the willingness or ability to

repay. A borrower’s past experience with other creditors is usually

a good indicator of future performance. More than a few

repayment irregularities reflects a higher risk than normal, in which

case something in the loan file should record that the credit history

was considered in the loan decision-making and that the higher

risk was deemed acceptable. If you find more than a few such

high-risk decisions, consider reporting to the board of directors

that loan delinquency and losses may rise in the future.
Supervisory Committee Guide

HOW DO WE AUDIT LOANS?

Chapter 10

10-8

Is the borrower

able to make the

loan payments?

10.12 The primary tool used to evaluate a borrower’s ability to

repay the loan is a credit analysis. A debt ratio calculation is a

typical method of evaluating the borrowers’ financial ability,

although some credit unions use alternative procedures, such as

a credit scoring system, to accomplish the same purpose.

Whatever is used, however, should be reasonable and should be

documented for review purposes in the loan files. You should

consider reporting a general concern to the board of directors if

you find numerous instances where the repayment ability is either

not documented or not evident.

NOTE: Loans can be granted to borrowers with high debt-toincome ratios if the number of people in the borrower’s

family can be reasonably supported by the net disposable

income after paying regular bills. For example, a high debt

ratio can be considered acceptable for a small family with a

large gross income. Debt ratios are useful “warning flags” to

show when to do a disposable income analysis, and not as

a fixed criteria for denying loans.

Could you

discuss with us

the sample

workpapers

appended to this

chapter?

10.13 The three attached workpapers are examples that you

can use to develop your own working papers. They are not allinclusive, and should be modified according to the level of internal

controls in your credit union.

See the instructions provided for each.
Supervisory Committee Guide

Appendices

Chapter 10

Appendix 10-A -- Instructions for Internal Control Checklist: Loans

(chklst10.doc)

What does this

checklist

accomplish?

Completing this workpaper should give you a basic understanding

about the internal controls in place and operating over loan activity

by the credit union. The checklist is designed to assist you in the

loan internal control review.

How do we

complete the

Checklist?

You will need to prepare a number of working papers in the

process of answering some questions on the checklist. We

provide two sample workpapers in this chapter:

1. Trial Balance of Individual Loans.

2. Loan Review.

About halfway through the checklist, you will have enough

understanding of the credit union’s internal control condition to

decide the size of your loan sample, and to perform your review of

individual loan files. After this loan review, you will be able to

finish this checklist and, based on the results, decide if you need

to do any extra sampling.
Appendix 10-A -- Internal Control Checklist: Loans

The following checklist should help you identify significant internal control or

operating weaknesses. You may find additional guidance in the AICPA’s “Audits of

Credit Unions” and/or “Credit Union Audit Manual.”

Test Procedure Yes No

1. Is the general ledger in

balance with the

individual loans?

Reconcile the GL balance with the Trial

Balance of Individual Shares and Loans.

(Note: Any different EDP system totals,

such as a credit card program, should be

added to the Trial Balance totals.)

2. Are interest charges

correct?

Test-check a sample of members’

statements having loan payments.

Recalculate the finance charges to make

sure the EDP is computing the correct

amounts.

3. Are interest refunds

correct?

Check for proper approval by the board of

directors. Test-check a sample of individual

refunds to see if the computer program is

set up for the right refund amount.

4. Is accrued interest

correct?

Review the balance in the accrual account

for reasonableness. Reconcile the detailed

transactions to the general ledger control

balance.

5. Is loan delinquency

accurately stated?

Verify loan delinquency accuracy. What is

the loan delinquency history and trends?

Does the evidence identify any unusual risk

that would warrant more extensive loan

testing?

6. Are any loans to

officials or employees

delinquent?

Check the amortization of outstanding loans

to these parties to determine if the loans

are being repaid in accordance with the

terms of the note. Any loans determined to

be delinquent but not being reported as

such must be disclosed immediately to the

board and surety. Also, officials have a

fiduciary responsibility to safeguard the

assets of the credit union. An official with a

delinquent loan is not fulfilling this

responsibility.
Appendix 10-A -- Internal Control Checklist: Loans

Test Procedure Yes No

10A-2

NOTE: At this point, you might decide to

determine the size of your loan sample

and review some individual loans, in

order to complete your evaluation of the

following internal control criteria.

7. Are loans properly

disbursed?

Test-check some loan disbursement checks

to ensure the check’s date is later than the

dates of the loan approval, and that the

person approving the loan didn’t also sign

the check. Trace the transactions in the

EDP system.

8. Did your sample of

“insider” loans show

proper approvals?

[R&R 701.21 (c)(3) and (d)(4)]

[Bylaws VII or IX]

Verify proper approval for insider loans.

The board must approve any loan to an

official that, when added to other loans,

exceeds regulatory limits for total

indebtedness to the credit union (subtract

any pledged shares).

9. Are terms for “insiders”

the same as for other

members?

[R&R 701.21(d)(5)]

Compare terms of “insiders” versus other

members. Elected and appointed officials,

and their immediate family members and

business associates, can’t get terms more

favorable than regular credit union

members.

10. Did your loan sample

show proper loan

documentation?

[Bylaws IX, 3][R&R 701.21(c)(3)]

• Test for completed applications and

notes, prepared in ink before signed.

• Test for recent credit reports, with

explanations for adverse items.

• If collateralized, verify the credit union

has valid title and insurance.

11. Did your loan sample

show avoidance of

repayment risk?

[Bylaws IX, 3][R&R 701.21(c)(3)]

Ensure that loan review illustrated, by debt

ratio or other financial analysis, that the

family unit can be supported by the

borrower’s debt-to-income condition.
Appendix 10-A -- Internal Control Checklist: Loans

Test Procedure Yes No

10A-3

12. Did the sampled loans

exceed limits set by the

board or NCUA?

[Bylaws IX, 3][R&R 701.21(c)(3)]

When reviewing the loan sample, compare

loan terms to policy and NCUA regulations

for incorrect or impermissible (a) size, (b)

maturity, and (c) annual percentage rate.

13. Did your loan sample

show approvals are

documented?

[Bylaws IX, 3]

Verify that the loan officer or credit

committee approval are recorded in the

individual loan files and in the permanent

minutes/records of the credit union.
Supervisory Committee Guide

Appendices

Chapter 10

Appendix 10-B -- Trial Balance of Members Loans Workpaper

(chptr10.xls)

What is the

purpose of this

workpaper?

By completing this workpaper, you will verify (or dispute) that the

general ledger control accounts accurately reflect the total of each

member’s loan balances.

How do I get

started?

Obtain a copy of the credit union’s Trial Balance of Members’

Shares and Loans report as of your audit date. The name of this

report may be slightly different, depending on your EDP vendor,

but is basically an itemized list of all members’ accounts in the

credit union. If your credit union has more than one EDP system

for accounts, such as a credit card vendor, you’ll also need a list

of those accounts.

How do we

complete the

workpaper?

This is a two-part workpaper, with typically no need to go past

SECTION A unless the shares or loans are out-of-balance for the

current month. SECTION B should be completed only to find out

if an out-of-balance condition is on-going or just occurred.

SECTION A: Insert the totals of all loan types in the general

ledger in the first set of input boxes. In the following set of boxes,

put the totals from the detailed report of shares and loans. The

workpaper computes and displays the amount of any differences.

SECTION B: Insert the loan data for the previous 2 months in the

boxes provided. Differences are displayed, and you can now

observe any changes in the out-of-balance amounts. If the

differences don’t change, you’ve found old errors. If the

differences change, recordkeeping errors are still occurring.
Supervisory Committee Guide

Appendices

Chapter 10

An out-of-balance condition represents a breakdown of accurate

and acceptable recordkeeping. In most cases, you can assume

the total of the detailed listing of members’ accounts is the true

figure, because the members’ accounts are verified biannually as

correct and members generally report errors when their periodic

statements are wrong. If the errors responsible for the out-ofbalance condition can’t be identified and corrected, the general

ledger balance is adjusted to match the individual account totals.

The adjustment creates either a loss or a gain.

Be aware that even a few dollars’ difference can be significant.

Sometimes very large errors might be involved which are

offsetting each other between the share and loan control

accounts.

What if the

differences are

due to old

errors?

Staff should research and correct the errors. After a reasonable

time and effort for corrections, such as 60 days, the differences

should be written off and the general ledger brought into balance

with the individual account totals.

What if the

differences

fluctuate?

The cause of the recordkeeping errors must be identified and

corrected. Make, or cause to be made, test checks on a sample

of members’ accounts in order to identify what type of postings

are causing the problem. Suggested minimum test checks are:

1. Start with a block of 25 member accounts at random which

have had transactions during the first 10 days of the month

you are auditing. Obtain printouts for the transactions on

each of these 25 accounts.

2. Obtain and have available all posting sources for the 10-day

period, such as Cash Received Vouchers, payroll deduction

listings, Journal Vouchers, etc. Obtain the detailed list of

daily transactions for each of the 10 days.

3. Compare each transaction on a member’s account with the
Supervisory Committee Guide

Appendices

Chapter 10

source documents. Each transaction should be accounted

for and matched to a proper source. Summarize and report

any incorrect postings you identified.

4. If your review of the block of 25 accounts fails to indicate

the cause of the out-of-balance condition, increase your

sample until the cause is isolated.

What do I

report?

You must report the situation to the board of directors. Your

report can include the following recommendations:

1. Staff should be given a reasonable time limit to research

errors and make corrections, such as 60 days, after which

the board of directors should authorize and direct staff to

adjust the general ledger account balances to bring them in

line with the individual account totals.

2. Adjusting entries should not be made until the board of

directors is assured that recordkeeping problems have been

resolved and the problem won’t recur. After correcting the

causes of the problem, adjusting entries should be deferred

until the accounts are kept in balance for at least 3 months

in a row.

What if my credit

union doesn’t

use data

processing?

Manual recordkeeping of members’ share and loan accounts

require additional committee controls and computations:

• You should get control of the ledger cards on a surprise basis,

if at all possible, at the start of the audit.

• Prepare an adding machine tape of the shares, and another of

the loans, in order to complete this workpaper.
APPENDIX 10B -- TRIAL BALANCE OF INDIVIDUAL LOANS

Credit Union: Ex Why Zee FCU Audit Date: 12/31/96

A. CURRENT BALANCES

TOTAL LOANS

General Ledger balance for total loans: 200,000,000.00

Sum of individual accounts from the Trial Balance(s): 190,000,000.00

 Potential adjustment/(write-off): [analyze below] (10,000,000.00)

B. ANALYSIS OF DIFFERENCES - Previous 3 Months

00/00/00 00/00/00 12/31/96

From the Trial Balance(s): 0.00 0.00 200,000,000.00

From the General Ledger: 0.00 0.00 190,000,000.00

 Gain(Loss): 0.00 0.00 (10,000,000.00)

Describe actions by staff to correct differences shown in Sections A and B:
Supervisory Committee Guide

Appendices

Chapter 10

Appendix 10-C -- Loan Review Workpaper

(chptr10.xls)

What is the

purpose of this

workpaper?

You can use this workpaper to control and document your review

of individual loans.

What do I need to

get started?

To complete this workpaper, you will need to get computer

printouts of loans, preferably sorted by loan type. The size of your

sample of each type depends on your assessment of the credit

union’s internal controls and your review of loan policies, so fill out

the Internal Controls Checklist right away. Be aware that any

other unusual factors can also affect the number of loans you

select for review. For example, you may decide to increase the

number of loans reviewed if you notice that loan delinquency is

rising, in order to identify and report the cause of the problem.

What do we look

for when

reviewing loans?

This workpaper is designed to evaluate the soundness of loan

decision-making. The focus is on three primary risk

characteristics:

• Is the borrower able to repay the loan granted?

• Is the borrower willing to repay debt?

• Is the loan adequately documented?

Testing these three key parts of the loan practices is part of your

responsibility to ensure that the credit union’s practices and

procedures are sufficient to safeguard members’ assets. You will

know if the board’s plans, policies, and control procedures are

properly administered, and are sufficient to safeguard against

error, carelessness, and improprieties.
APPENDIX 10C -- Loan Review Workpaper

Credit Union: Ex Why Zee FCU Audit Date

Loan: Financial Analysis: Credit Analysis: 

Name of Borrower Acct. No. date type balance d.ratio comments cr.rpt. comments 

Doe, John 12345 12/31/96 100,000 46 comaker y Smith, Mary 65432 2/1/94 5,000 24 n/a y 

Page 1 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-1 

Chapter 11 -- HOW DO WE REVIEW THE “ALLOWANCE FOR LOAN LOSSES”? 

11.01 What is the Allowance for Loan and Lease Losses? 

11.02 Who is responsible for the ALLL? 

11.03 In our role of validating the methodology, would you clarify what you mean by 

“methodology”? 

11.04 What are these “common elements” an ALLL methodology should have? 

11.05 In our role of overseeing and monitoring internal controls over the ALLL 

process, what should we focus on? 

11.06 What sorts of ALLL policies and procedures should we expect to find? 

11.07 Could you elaborate on the rules that govern establishing an ALLL? 

11.08 Could you expand on the requirements in relation to the ALLL under FAS 114? 

11.09 Could you expand on the requirements in relation to the ALLL under FAS 5? 

11.10 What documentation standards should the credit union meet? 

11.11 Could you be more specific concerning the documentation of ALLL 

methodology in written policies and procedures? 

11.12 Is there a lesser documentation burden for small credit unions? 

11.13 Could you provide some guidance on the process of consolidating the loss 

estimates? 

11.14 What should we focus on in validating the ALLL methodology? 

11.15 What documentation do we need to support the validation process? 

Appendices 

11-A ALLL Questions and Answers 

11-B Allowance for Loan Losses Workpaper 

11-C Allowance for Loan Losses Checklist

What is the 

Allowance for 

Loan and Lease 

Losses? 

11.01 An allowance for loan and lease losses (ALLL) recorded 

pursuant to generally accepted accounting principles (GAAP) is a 

credit union’s best estimate of the probable amount of loans and 

lease-financing receivables that it will be unable to collect based on 

current information and events. Loans are considered impaired 

when, based on current information and events, it is probable that 

the creditor will be unable to collect all interest and principal 

payments due according to the contractual terms of the loan 

agreement. The ALLL is reported as an asset valuation account. 

For financial reporting purposes, including regulatory reporting, the 

provision for loan and lease losses and the ALLL must be 

determined in accordance with GAAP. A creditor should record an 

ALLL when the criteria for accrual of a loss contingency as set forth 

in GAAP have been met. Estimating the amount of an ALLL 

involves a high degree of management judgment and is inevitably 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-2 

 

imprecise. GAAP requires that allowances be well documented, 

with clear explanations of the supporting analyses and rationale. 

Who is 

responsible for 

the ALLL? 

11.02 The responsibility for the ALLL policy is shared between the 

board, management and the supervisory committee. 

The Board’s Responsibility. Boards of directors of federallyinsured credit unions are responsible for ensuring that their credit 

unions have controls in place to consistently determine the ALLL in 

accordance with the credit union’s stated policies and procedures, 

GAAP, and ALLL supervisory guidance. To fulfill this 

responsibility, boards of directors instruct management to develop 

and maintain an appropriate, systematic, and consistently applied 

process to determine the amounts of the ALLL and provisions for 

loan losses. The amounts to be reported each period for the 

provision for loan and lease losses and the ALLL should be 

reviewed and approved by the board of directors. 

Management’s Responsibility. The determination of the amounts 

of the ALLL and provisions for loan and lease losses should be 

based on management’s current judgments about the credit quality 

of the loan portfolio, and should consider all known relevant 

internal and external factors that affect loan collectibility as of the 

reporting date. Management should create and implement suitable 

policies and procedures to communicate the ALLL process 

internally to all applicable personnel. 

Regardless of who develops and implements these policies, 

procedures, and the underlying controls, the board of directors 

should assure themselves that the policies specifically address the 

credit union’s unique goals, systems, risk profile, personnel, and 

other resources before approving them. Additionally, by creating 

an environment that encourages personnel to follow these policies 

and procedures, management improves procedural discipline and 

compliance. 

Supervisory Committee’s Responsibility. To ensure the 

methodology remains appropriate for the credit union, the board of 

directors should have the methodology periodically validated and, if 

appropriate, revised. Further, the supervisory or audit committee1

 

(or its delegated representative(s)) should oversee and monitor the 

 

1

 All federal credit unions must establish a supervisory committee. If a federally insured state chartered credit 

union does not have either a supervisory or audit committee, the board of directors retains this responsibility. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-3 

internal controls over the ALLL determination process. 

The validation process is discussed in greater detail in the last two 

sections of this chapter. 

In our role of 

validating the 

methodology, 

would you clarify 

what you mean 

by “methodology”? 

11.03 An ALLL methodology is a system that a credit union 

designs and implements to reasonably estimate loan and lease 

losses as of the financial statement date. It is critical that ALLL 

methodologies incorporate management’s current judgments about 

the credit quality of the loan portfolio through a disciplined and 

consistently applied process. 

A credit union’s ALLL methodology is influenced by credit unionspecific factors, such as a credit union’s size, organizational 

structure, business environment and strategy, management style, 

loan portfolio characteristics, loan administration procedures, and 

management information systems. However, there are certain 

common elements a credit union should incorporate in its ALLL 

methodology. 

What are these 

“common 

elements” an 

ALLL 

methodology 

should have? 

11.04 While different credit unions may use different methods, 

there are certain common elements that should be included in any 

loan loss allowance methodology. Generally, a credit union’s 

methodology should: 

1. Include a detailed analysis of the loan portfolio, performed on a 

regular basis; 

2. Consider all loans (whether on an individual or group basis); 

3. Identify large balance, non-homogeneous loans to be 

evaluated for impairment on an individual basis under FAS 114 

(see paragraph 11.08) and segment the remainder of the portfolio 

into groups of loans with similar risk characteristics for evaluation 

and analysis under FAS 5; 

4. Consider all known relevant internal and external factors that 

may affect loan collectibility; 

5. Be applied consistently but, when appropriate, be modified for 

new factors affecting collectibility; 

6. Consider the particular risks inherent in different kinds of 

lending; 

7. Consider current collateral values (less costs to sell), where 

applicable;
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-4 

8. Require that analyses, estimates, reviews and other ALLL 

methodology functions be performed by competent and welltrained personnel; 

9. Be based on current and reliable data; 

10. Be well documented with clear explanations of the supporting 

analyses and rationale; and 

11. Include a systematic and logical method to consolidate the loss 

estimates and ensure the ALLL balance is recorded in accordance 

with GAAP. 

A systematic methodology that is properly designed and 

implemented should result in a credit union’s best estimate of the 

ALLL. Accordingly, credit unions should adjust their ALLL balance, 

either upward or downward, in each period for differences between 

the results of the systematic determination process and the 

unadjusted ALLL balance in the general ledger. 

In our role of 

overseeing and 

monitoring 

internal controls 

over the ALLL 

process, what 

should we focus 

on? 

11.05 An internal control system for the ALLL estimation process 

should: 

(1) Include measures to ensure the reliability and integrity of 

information and compliance with laws, regulations, and internal 

policies and procedures; 

(2) Reasonably ensure that the credit union’s financial statements 

(including regulatory reports) are prepared in accordance with 

GAAP and ALLL supervisory guidance; and 

(3) Include a well-defined loan review process containing: 

(a) An effective loan grading system that is consistently 

applied, identifies differing risk characteristics and loan 

quality problems accurately and in a timely manner, and 

prompts appropriate administrative actions; 

(b) Sufficient internal controls to ensure that all relevant 

loan review information is appropriately considered in 

estimating losses. This includes maintaining appropriate 

reports, details of reviews performed, and identification of 

personnel involved; and 

(c) Clear formal communication and coordination between 

a credit union’s credit administration function, financial 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-5 

reporting group, management, board of directors, and others 

who are involved in the ALLL determination process or 

review process, as applicable (e.g., written policies and 

procedures, management reports, audit programs, and 

committee minutes). 

What sorts of 

ALLL policies 

and procedures 

should we expect 

to find? 

11.06 Credit unions use a wide range of policies, procedures, and 

control systems in their ALLL process. Sound policies should be 

appropriately tailored to the size and complexity of the credit union 

and its loan portfolio. In order for a credit union’s ALLL 

methodology to be effective, the credit union’s written policies and 

procedures for the systems and controls that maintain an 

appropriate ALLL should address but not be limited to: 

(1) The roles and responsibilities of the credit union’s departments 

and personnel (including the lending function, credit review, 

financial reporting, internal audit, senior management, audit 

committee, board of directors, and others, as applicable) who 

determine, or review, as applicable, the ALLL to be reported in the 

financial statements; 

(2) The credit union’s accounting policies for loans and loan 

losses, including the policies for charge-offs and recoveries and for 

estimating the fair value of collateral, where applicable; 

(3) The description of the credit union’s systematic methodology, 

which should be consistent with the credit union’s accounting 

policies for determining its ALLL; and 

(4) The system of internal controls used to ensure that the ALLL 

process is maintained in accordance with GAAP and supervisory 

guidance. 

Could you 

elaborate on the 

rules that govern 

establishing an 

ALLL? 

11.07 Generally accepted accounting principles (GAAP) govern 

establishing the ALLL. Generally, the most relevant GAAP 

references include: 

• Statement of Financial Accounting Standards No. 5, 

Accounting for Contingencies (FAS 5), which provides the 

basic guidance for recognition of a loss contingency, such 

as the collectibility of loans (receivables), when it is 

probable that a loss has been incurred and the amount can 

be reasonably estimated. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-6 

• Statement of Financial Accounting Standards No. 114, 

Accounting by Creditors for Impairment of a Loan (FAS 

114) which provides more specific guidance about the 

measurement and disclosure of impairment for certain 

types of loans.2 Specifically, FAS 114 applies to loans that 

are identified for evaluation on an individual basis. Loans 

are considered impaired when, based on current 

information and events, it is probable that the creditor will 

be unable to collect all interest and principal payments due 

according to the contractual terms of the loan agreement. 

Other GAAP guidance includes: 

• FIN 14, Reasonable Estimation 

• AICPA Audit & Accounting Guides 

• FASB Viewpoints – EITF Topic D-80

Could you 

expand on the 

requirements in 

relation to the 

ALLL under FAS 

114? 

11.08 Large groups of smaller-balance homogeneous loans that 

are collectively evaluated for impairment are not included in the 

scope of FAS 114.

3

 Such groups of loans may include, but are not 

limited to, credit card, residential mortgage, and consumer 

installment loans. FAS 5 addresses the accounting for impairment 

of these loans (see next question). 

For individually impaired loans, FAS 114 provides guidance on the 

acceptable methods to measure impairment. Specifically, FAS 114 

states that when a loan is impaired, a creditor should measure 

impairment based on the present value of expected future principal 

and interest cash flows discounted at the loan’s effective interest 

rate, except that as a practical expedient, a creditor may measure 

impairment based on a loan’s observable market price or the fair 

value of collateral, if the loan is collateral dependent. When 

developing the estimate of expected future cash flows for a loan, a 

credit union should consider all available information reflecting past 

events and current conditions, including the effect of existing 

environmental factors. 

A credit union’s ALLL methodology related to FAS 114 loans 

begins with the use of its normal loan review procedures to identify 

 

2

Emerging Issues Taskforce (EITF) Topic D-80 includes additional guidance on the requirements of FAS 5 and 

FAS 114 and how they relate to each other. The AICPA is currently developing a Statement of Position (SOP) 

that will provide more specific guidance on accounting for loan losses. 3

 In addition, FAS 114 does not apply to loans measured at fair value or at the lower of cost or fair value, leases, 

or debt securities. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-7 

 

whether a loan is impaired as defined by the accounting standard. 

Credit unions should document: 

(1) The method and process for identifying loans to be evaluated 

under FAS 114 and 

(2) The analysis that resulted in an impairment decision for each 

loan and the determination of the impairment measurement 

method to be used (i.e., present value of expected future cash 

flows, fair value of collateral less costs to sell, or the loan’s 

observable market price). 

Once a credit union has determined which of the three available 

measurement methods to use for an impaired loan under FAS 114, 

it should maintain supporting documentation as follows: 

(1) When using the present value of expected future cash flows 

method: 

(a) The amount and timing of cash flows, 

(b) The effective interest rate used to discount the cash flows, 

and 

(c) The basis for the determination of cash flows, including 

consideration of current environmental factors and other 

information reflecting past events and current conditions. 

(2) When using the fair value of collateral method: 

(a) How fair value was determined, including the use of 

appraisals, valuation assumptions, and calculations, 

(b) The supporting rationale for adjustments to appraised 

values, if any, 

(c) The determination of costs to sell, if applicable, and 

(d) Appraisal quality, and the expertise and independence of 

the appraiser. 

(3) When using the observable market price of a loan method: 

(a) The amount, source, and date of the observable market 

price. 

Q&A #1 and #2 in Appendix A provide examples of applying and 

documenting impairment measurement methods under FAS 114. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-8 

Some loans that are evaluated individually for impairment under 

FAS 114 may be fully collateralized and therefore require no ALLL. 

Q&A #3 in Appendix A presents an example of a credit union 

whose loan portfolio includes fully collateralized loans and 

describes the documentation maintained by that credit union to 

support its conclusion that no ALLL was needed for those loans. 

Could you 

expand on the 

requirements in 

relation to the 

ALLL under FAS 

5? 

11.09 Segmenting the Portfolio. For loans evaluated on a group 

basis under FAS 5, management should segment the loan portfolio 

by identifying risk characteristics that are common to groups of 

loans. Credit unions typically decide how to segment their loan 

portfolios based on many factors, which vary with their business 

strategies as well as their information system capabilities. Smaller 

credit unions that are involved in less complex activities often 

segment the portfolio into broad loan categories. This method of 

segmenting the portfolio is likely to be appropriate only in small 

credit unions offering a narrow range of loan products. Larger 

credit unions typically offer a more diverse and complex mix of loan 

products. Such credit unions may start by segmenting the 

portfolio into major loan types but typically have more detailed 

information available that allows them to further segregate the 

portfolio into product line segments based on the risk 

characteristics of each portfolio segment. Regardless of the 

segmentation method used, a credit union should maintain 

documentation to support its conclusion that the loans in each 

segment have similar attributes or characteristics. 

As economic and other business conditions change, credit unions 

often modify their business strategies, which may result in 

adjustments to the way in which they segment their loan portfolio 

for purposes of estimating loan losses. 

Credit unions use a variety of documents to support the 

segmentation of their portfolios. 

Some of these documents include: 

• Loan trial balances by categories and types of loans, 

• Management reports about the mix of loans in the portfolio, 

• Delinquency and nonaccrual reports, and 

• A summary presentation of the results of an internal or 

external loan grading review. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-9 

 

Reports generated to assess the profitability of a loan product line 

may be useful in identifying areas in which to further segment the 

portfolio. 

Estimating Loss on Groups of Loans. Based on the segmentation 

of the portfolio, a credit union should estimate the FAS 5 portion of 

the ALLL. For those segments that require an ALLL, 4 the 

creditunion should estimate the loan and lease losses, on at least a 

quarterly basis, based upon its ongoing loan review process and 

analysis of loan performance. The credit union should follow a 

systematic and consistently applied approach to select the most 

appropriate loss measurement methods and support its 

conclusions and rationale with written documentation. Regardless 

of the method used to measure losses, a credit union should 

demonstrate and document that the loss measurement methods 

used to estimate the ALLL for each segment are determined in 

accordance with GAAP as of the financial statement date. 

One method of estimating loan losses for groups of loans is 

through the application of loss rates to the groups’ aggregate loan 

balances. Such loss rates typically reflect historical loan loss 

experience for each group of loans, adjusted for relevant 

environmental factors (e.g., industry, geographical, economic, and 

political factors) over a defined period of time. If a credit union 

does not have loss experience of its own, it may be appropriate to 

reference the loss experience of other credit unions, provided that 

the credit union demonstrates that the attributes of the loans in its 

portfolio segment are similar to those of the loans included in the 

portfolio of the credit union providing the loss experience.5

 Credit 

unions should maintain supporting documentation for the technique 

used to develop their loss rates, including the period of time over 

which the losses were incurred. If a range of loss is determined, 

credit unions should maintain documentation to support the 

identified range and the rationale used for determining which 

estimate is the best estimate within the range of loan losses. 

Before employing a loss estimation model, a credit union should 

evaluate and modify, as needed, the model’s assumptions to 

ensure that the resulting loss estimate is consistent with GAAP. In 

order to demonstrate consistency with GAAP, credit unions that 

use loss estimation models typically document the evaluation, the 

conclusions regarding the appropriateness of estimating loan 

 

4

 An example of a loan segment that does not generally require an ALLL is loans that are fully secured by 

deposits maintained at the lending credit union. 

5

 Refer to paragraph 23 of FAS 5. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-10 

losses with a model or other loss estimation tool, and the support 

for adjustments to the model or its results. 

In developing loss measurements, credit unions should consider 

the impact of current environmental factors and then document 

which factors were used in the analysis and how those factors 

affect the loss measurements. Factors that should be considered 

in developing loss measurements include the following: 

(1) Levels of and trends in delinquencies and impaired loans; 

(2) Levels of and trends in charge-offs and recoveries; 

(3) Trends in volume and terms of loans; 

(4) Effects of any changes in risk selection and underwriting 

standards, and other changes in lending policies, procedures, and 

practices; 

(5) Experience, ability, and depth of lending management and 

other relevant staff; 

(6) National and local economic trends and conditions; 

(7) Industry conditions; and 

(8) Effects of changes in credit concentrations. 

For any adjustment of loss measurements for environmental 

factors, the credit union should maintain sufficient, objective 

evidence to support the amount of the adjustment and to explain 

why the adjustment is necessary to reflect current information, 

events, circumstances, and conditions in the loss measurements. 

Q&A #4 in Appendix A provides an example of maintaining 

supporting documentation for adjustments to portfolio segment loss 

rates for an environmental factor related to an economic downturn 

in the borrower’s primary industry. Q&A #5 in Appendix A 

describes one credit union’s process for determining and 

documenting an ALLL for loans that are not individually impaired 

but have characteristics indicating there are loan losses on a group 

basis. 

Layering Loan Losses. Credit unions should ensure that they do 

not layer their loan loss allowances. Layering is the inappropriate 

practice of recording in the ALLL more than one amount for the 

same probable loan loss. Layering can happen when a credit 

union includes a loan in one segment, determines its best estimate 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-11 

of loss for that loan either individually or on a group basis (after 

taking into account all appropriate environmental factors, 

conditions, and events), and then includes the loan in another 

group, which receives an additional ALLL amount.6

What documentation standards 

should the credit 

union meet? 

11.10 Appropriate written supporting documentation facilitates 

review of the ALLL process and reported amounts, builds discipline 

and consistency into the ALLL determination process, and 

improves the process for estimating loan and lease losses by 

helping to ensure that all relevant factors are appropriately 

considered in the ALLL analysis. A credit union should document 

the relationship between the findings of its detailed review of the 

loan portfolio and the amount of the ALLL and the provision for 

loan and lease losses reported in each period. 

At a minimum, credit unions should maintain written supporting 

documentation for the following decisions, strategies, and 

processes: 

1. Policies and procedures: 

a. Over the systems and controls that maintain an 

appropriate ALLL, and 

b. Over the ALLL methodology, 

2. Loan grading system or process, 

3. Summary or consolidation of the ALLL balance, 

4. Validation of the ALLL methodology, and 

5. Periodic adjustments to the ALLL process. 

Could you be 

more specific 

concerning the 

documentation of 

ALLL 

methodology in 

written policies 

and procedures? 

11.11 A credit union’s written policies and procedures should 

describe the primary elements of the credit union’s ALLL 

methodology, including portfolio segmentation and impairment 

measurement. In order for a credit union’s ALLL methodology to 

be effective, the credit union’s written policies and procedures 

should describe the methodology: 

 

6

 According to the Federal Financial Institutions Examination Council’s Federal Register Notice, 

Implementation Issues Arising from FASB Statement No. 114, Accounting by Creditors for Impairment of a 

Loan, published February 10, 1995, institution-specific issues should be reviewed when estimating loan losses 

under FAS 114. This analysis should be conducted as part of the evaluation of each individual loan reviewed 

under FAS 114 to avoid potential ALLL layering.
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-12 

(1) For segmenting the portfolio: 

(a) How the segmentation process is performed (i.e., by loan 

type, industry, risk rates, etc.), 

(b) When a loan grading system is used to segment the 

portfolio: 

(i) The definitions of each loan grade, 

(ii) A reconciliation of the internal loan grades to 

supervisory loan grades, and 

(iii) The delineation of responsibilities for the loan 

grading system. 

(2) For determining and measuring impairment under FAS 114: 

(a) The methods used to identify loans to be analyzed 

individually; 

(b) For individually reviewed loans that are impaired, how the 

amount of any impairment is determined and measured, 

including: 

(i) Procedures describing the impairment measurement 

techniques available and 

(ii) Steps performed to determine which technique is 

most appropriate in a given situation. 

(c) The methods used to determine whether and how loans 

individually evaluated under FAS 114, but not considered to 

be individually impaired, should be grouped with other 

loans that share common characteristics for impairment 

evaluation under FAS 5. 

(3) For determining and measuring impairment under FAS 5: 

(a) How loans with similar characteristics are grouped to be 

evaluated for loan collectibility (such as loan type, past-due 

status, and risk); 

(b) How loss rates are determined (e.g., historical loss rates 

adjusted for environmental factors or migration analysis) 

and what factors are considered when establishing 

appropriate time frames over which to evaluate loss 

experience; and 

(c) Descriptions of qualitative factors (e.g., industry, 

geographical, economic and political factors) that may 

affect loss rates or other loss measurements. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-13 

The supporting documents for the ALLL may be integrated in a 

credit union’s credit files, loan review reports or worksheets, board 

of directors’ and committee meeting minutes, computer reports, or 

other appropriate documents and files. 

Is there a lesser 

documentation 

burden for small 

credit unions? 

11.12 While the guidance applies equally to all credit unions, 

regardless of the size, it recognizes operational and managerial 

standards that are appropriate for a credit union’s size and the 

nature and scope of its activities. 

For example, credit unions with less complex lending activities and 

products may find it more efficient to combine a number of 

procedures (e.g., information gathering, documentation, and 

internal approval processes) while continuing to ensure the credit 

union has a consistent and appropriate methodology. 

Thus, much of the supporting documentation required for a credit 

union with more complex products or portfolios may be combined 

into fewer supporting documents in a credit union with less 

complex products or portfolios. As a further example, simplified 

documentation can include spreadsheets, check lists, and other 

summary documents that many credit unions currently use. 

Could you 

provide some 

guidance on the 

process of 

consolidating the 

loss estimates? 

11.13 To verify that ALLL balances are presented fairly in 

accordance with GAAP and are auditable, management should 

prepare a document that summarizes the amount to be reported in 

the financial statements for the ALLL. The board of directors 

should review and approve this summary. 

Common elements in such summaries include: 

(1) An estimate of the probable loss or range of loss incurred for 

each category evaluated (e.g., individually evaluated impaired 

loans, homogeneous pools, and other groups of loans that are 

collectively evaluated for impairment); 

(2) The aggregate probable loss estimated using the credit union’s 

methodology; 

(3) A summary of the current ALLL balance; 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-14 

(4) The amount, if any, by which the ALLL is to be adjusted;7

 and 

(5) Depending on the level of detail that supports the ALLL 

analysis, detailed sub-schedules of loss estimates that reconcile to 

the summary schedule. 

Generally, a credit union’s review and approval process for the 

ALLL relies upon the data provided in these consolidated 

summaries. 

There may be instances in which individuals or committees that 

review the ALLL methodology and resulting allowance balance 

identify adjustments that need to be made to the loss estimates to 

provide a better estimate of loan losses. These changes may be 

due to information not known at the time of the initial loss estimate 

(e.g., information that surfaces after determining and adjusting, as 

necessary, historical loss rates, or a recent decline in the 

marketability of property after conducting a FAS 114 valuation 

based upon the fair value of collateral). 

 It is important that these adjustments are consistent with GAAP 

and are reviewed and approved by appropriate personnel. 

Additionally, the summary should provide each subsequent 

reviewer with an understanding of the support behind these 

adjustments. Therefore, management should document the nature 

of any adjustments and the underlying rationale for making the 

changes. This documentation should be provided to those making 

the final determination of the ALLL amount. Q&A #6 in Appendix A 

addresses the documentation of the final amount of the ALLL. 

What should we 

focus on in 

validating the 

ALLL 

methodology? 

11.14 A credit union’s ALLL methodology is considered valid 

when it accurately estimates the amount of loss contained in the 

portfolio. Thus, the credit union’s methodology should include 

procedures that adjust loss estimation methods to reduce 

differences between estimated losses and actual subsequent 

charge-offs, as necessary. 

 

7

 Subsequent to adjustments, there should be no material differences between the 

consolidated loss estimate, as determined by the methodology, and the final ALLL balance 

reported in the financial statements. 
Supervisory Committee Guide, Change 1 

HOW DO WE REVIEW THE ALLL? 

Chapter 11 

11-15 

To verify that the ALLL methodology is valid and conforms to 

GAAP and supervisory guidance, a credit union’s directors should 

establish internal control policies, appropriate for the size of the 

credit union and the type and complexity of its loan products. 

These policies should include procedures for a review, by a party 

who is independent of the ALLL estimation process, of the ALLL 

methodology and its application in order to confirm its 

effectiveness. 

In practice, credit unions employ numerous procedures when 

validating the reasonableness of their ALLL methodology and 

determining whether there may be deficiencies in their overall 

methodology or loan grading process. Examples are: 

(1) A review of trends in loan volume, delinquencies, 

restructurings, and concentrations. 

(2) A review of previous charge-off and recovery history, including 

an evaluation of the timeliness of the entries to record both the 

charge-offs and the recoveries. 

(3) A review by a party that is independent of the ALLL estimation 

process. This often involves the independent party reviewing, on a 

test basis, source documents and underlying assumptions to 

determine that the established methodology develops reasonable 

loss estimates. 

(4) An evaluation of the appraisal process of the underlying 

collateral. This may be accomplished by periodically comparing 

the appraised value to the actual sales price on selected properties 

sold. 

What documentation do we need 

to support the 

validation 

process? 

11.15 Management usually supports the validation process with 

the workpapers from the ALLL review function. Additional 

documentation often includes the summary findings of the 

independent reviewer. The credit union’s board of directors, or its 

designee, reviews the findings and acknowledges its review in its 

meeting minutes. If the methodology is changed based upon the 

findings of the validation process, documentation that describes 

and supports the changes should be maintained. 
Supervisory Committee Guide, Change 1 

Appendices 

Chapter 11 

11-A-1 

APPENDIX A – ALLL QUESTIONS AND ANSWERS 

Introduction 

The Questions and Answers (Q&As) presented in this appendix serve several purposes, 

including (1) to illustrate the NCUA’s views, as set forth in this IRPS, about the types of 

decisions, determinations, and processes a credit union should document with respect to its 

ALLL methodology and amounts; and (2) to illustrate the types of ALLL documentation and 

processes a credit union might prepare, retain, or use in a particular set of circumstances. 

The level and types of documentation described in the Q&As should be considered neither 

the minimum acceptable level of documentation nor an all-inclusive list. Credit unions are 

expected to apply the guidance in this IRPS to their individual facts, circumstances, and 

situations. If a credit union’s fact pattern differs from the fact patterns incorporated in the 

following Q&As, the credit union may decide to prepare and maintain different types of 

documentation than did the credit unions depicted in these Q&As. 

Q&A #1 - ALLL Under FAS 114 – Measuring and Documenting Impairment 

Facts: Approximately one-third of Credit Union A’s business loan portfolio consists of large 

balance, non-homogeneous loans. Due to their large individual balances, these loans meet 

the criteria under Credit Union A’s policies and procedures for individual review for 

impairment under FAS 114. Upon review of the large balance loans, Credit Union A 

determines that certain of the loans are impaired as defined by FAS 114. 

Question: For the business loans reviewed under FAS 114 that are individually impaired, 

how should Credit Union A measure and document the impairment on those loans? Can it 

use an impairment measurement method other than the methods allowed by FAS 114? 

Interpretive Response: For those loans that are reviewed individually under FAS 114 and 

considered individually impaired, Credit Union A must use one of the methods for measuring 

impairment that is specified by FAS 114 (that is, the present value of expected future cash 

flows, the loan’s observable market price, or the fair value of collateral). Accordingly, in the 

circumstances described above, for the loans considered individually impaired under FAS 

114, it would not be appropriate for Credit Union A to choose a measurement method not 

prescribed by FAS 114. For example, it would not be appropriate to measure loan 

impairment by applying a loss rate to each loan based on the average historical loss 

percentage for all of its business loans for the past five years. 

Credit Union A should maintain, as sufficient, objective evidence, written documentation to 

support its measurement of loan impairment under FAS 114. If Credit Union A uses the 

present value of expected future cash flows to measure impairment of a loan, it should 

document the amount and timing of cash flows, the effective interest rate used to discount 

the cash flows, and the basis for the determination of cash flows, including consideration of 

current environmental factors1

 and other information reflecting past events and current 

 

1 Question #16 in Exhibit D-80A of EITF Topic D-80 and attachments indicates that environmental factors 

include existing industry, geographical, economic, and political factors. 
Supervisory Committee Guide, Change 1 

Appendices 

Chapter 11 

11-A-2 

conditions. When Credit Union A uses the fair value of collateral to measure impairment, 

Credit Union A should document how it determined the fair value, including the use of 

appraisals, valuation assumptions and calculations, the supporting rationale for adjustments 

to appraised values, if any, and the determination of costs to sell, if applicable, appraisal 

quality, and the expertise and independence of the appraiser. Similarly, Credit Union A 

should document the amount, source, and date of the observable market price of a loan, if 

that method of measuring loan impairment is used. 

Q&A #2 – ALLL Under FAS 114 – Measuring Impairment for a Collateral Dependent 

Loan 

Facts: Credit Union B has a $10 million loan outstanding to Member X that is secured by 

real estate, which Credit Union B individually evaluates under FAS 114 due to the loan’s 

size. Member X is delinquent in its loan payments under the terms of the loan agreement. 

Accordingly, Credit Union B determines that its loan to Member X is impaired, as defined by 

FAS 114. Because the loan is collateral dependent, Credit Union B measures impairment of 

the loan based on the fair value of the collateral. Credit Union B determines that the most 

recent valuation of the collateral was performed by an appraiser eighteen months ago and, 

at that time, the estimated value of the collateral (fair value less costs to sell) was $12 

million. 

Credit Union B believes that certain of the assumptions that were used to value the 

collateral eighteen months ago do not reflect current market conditions and, therefore, the 

appraiser’s valuation does not approximate current fair value of the collateral. Several 

buildings, which are comparable to the real estate collateral, were recently completed in the 

area, increasing vacancy rates, decreasing lease rates, and attracting several tenants away 

from the borrower. Accordingly, credit review personnel at Credit Union B adjust certain of 

the valuation assumptions to better reflect the current market conditions as they relate to the 

loan’s collateral.2

 After adjusting the collateral valuation assumptions, the credit review 

department determines that the current estimated fair value of the collateral, less costs to 

sell, is $8 million. Given that the recorded investment in the loan is $10 million, Credit Union 

B concludes that the loan is impaired by $2 million and records an allowance for loan losses 

of $2 million. 

Question: What type of documentation should Credit Union B maintain to support its 

determination of the allowance for loan losses of $2 million for the loan to Member X? 

Interpretive Response: Credit Union B should document that it measured impairment of the 

loan to Member X by using the fair value of the loan’s collateral, less costs to sell, which it 

estimated to be $8 million. This documentation should include the credit union’s rationale 

and basis for the $8 million valuation, including the revised valuation assumptions it used, 

the valuation calculation, and the determination of costs to sell, if applicable. Because 

Credit Union B arrived at the valuation of $8 million by modifying an earlier appraisal, it 

should document its rationale and basis for the changes it made to the valuation 

 

2 When reviewing collateral dependent loans, Credit Union B may often find it more appropriate to obtain an 

updated appraisal to estimate the effect of current market conditions on the appraised value instead of internally 

estimating an adjustment. 
Supervisory Committee Guide, Change 1 

Appendices 

Chapter 11 

11-A-3 

assumptions that resulted in the collateral value declining from $12 million eighteen months 

ago to $8 million in the current period.3

 

Q&A #3 – ALLL Under FAS 114 – Fully Collateralized Loans 

Facts: Credit Union C has $500,000 in business loans that are fully collateralized by 

purchased business equipment. The loan agreement for each of these loans requires the 

borrower to provide qualifying collateral sufficient to fully secure each loan. The member 

borrowers have physical control of the collateral. Credit Union C perfected its security 

interest in the collateral when the funds were originally distributed. On an annual basis, 

Credit Union C determines the market value of the collateral for each loan using two 

independent market quotes and compares the collateral value to the loan carrying value. 

Semiannually or more frequently as needed, the Credit Union C’s credit administration 

function physically inspects the equipment. If there are any collateral deficiencies, Credit 

Union C notifies the borrower and requests that the borrower immediately remedy the 

deficiency. Due in part to its efficient operation, Credit Union C has historically not incurred 

any material losses on these loans. Credit Union C believes these loans are fullycollateralized and therefore does not maintain any ALLL balance for these loans. 

Question: What documentation does Credit Union C maintain to adequately support its 

determination that no allowance is needed for this group of loans? 

Interpretive Response: Credit Union C’s management summary of the ALLL includes 

documentation indicating that, in accordance with the credit union’s ALLL policy, the 

collateral protection on these loans has been verified by the credit union, no probable loss 

has been incurred, and no ALLL is necessary. Documentation in Credit Union C’s loan files 

includes the two independent market quotes obtained annually for each loan’s collateral 

amount, the documents evidencing the perfection of the security interest in the collateral, 

and other relevant supporting documents. Additionally, Credit Union C’s ALLL policy 

includes a discussion of how to determine when a loan is considered “fully collateralized” 

and does not require an ALLL. Credit Union C’s policy requires the following factors to be 

considered and the credit union’s findings concerning these factors to be fully documented: 

1. Volatility of the market value of the collateral; 

2. Recency and reliability of the appraisal or other valuation; 

3. Recency of the credit union or other third party inspection of the collateral; 

4. Historical losses on similar loans; 

5. Confidence in the credit union’s lien or security position including appropriate: 

a. Type of security perfection (e.g., physical possession of collateral or secured 

filing); 

b. Filing of security perfection (i.e., correct documents and with the appropriate 

officials); and 

 

3

In accordance with the FFIEC’s Federal Register Notice, Implementation Issues Arising from FASB No. 114, 

"Accounting by Creditors for Impairment of a Loan," published February 10, 1995 (60 FR 7966, February 10, 

1995), impaired, collateral-dependent loans must be reported at the fair value of collateral, less costs to sell, in 

regulatory reports. This treatment is to be applied to all collateral-dependent loans, regardless of type of 

collateral.
Supervisory Committee Guide, Change 1 

Appendices 

Chapter 11 

11-A-4 

c. Relationship to other liens. 

6. Other factors as appropriate for the loan type 

Q&A #4 – ALLL Under FAS 5 – Adjusting Loss Rates 

Facts: Credit Union D’s field of membership (lending area) includes a metropolitan area that 

is financially dependent upon the profitability of a number of sponsor manufacturing 

businesses. These businesses use highly specialized equipment and significant quantities 

of rare metals in the manufacturing process. Due to increased low-cost foreign competition, 

several of the parts suppliers servicing these sponsor manufacturing firms declared 

bankruptcy. The foreign suppliers have subsequently increased prices and the sponsor 

manufacturing firms have suffered from increased equipment maintenance costs and 

smaller profit margins. Additionally, the cost of the rare metals used in the manufacturing 

process increased and has now stabilized at double last year’s price. Due to these events, 

the sponsor manufacturing businesses are experiencing financial difficulties and have 

recently announced downsizing plans. 

Although Credit Union D has yet to confirm an increase in its loss experience as a result of 

these events, management knows that the credit union lends to a significant number of 

member’s for business and individual purposes whose repayment ability depends upon the 

long-term viability of the sponsor manufacturing businesses. Credit Union D’s management 

has identified particular segments of its business and consumer member bases that include 

member borrowers highly dependent upon sales or salary from the sponsor manufacturing 

businesses. Credit Union D’s management performs an analysis of the affected portfolio 

segments to adjust its historical loss rates used to determine the ALLL. In this particular 

case, Credit Union D has experienced similar business and lending conditions in the past 

that it can compare to current conditions. 

Question: How should Credit Union D document its support for the loss rate adjustments 

that result from considering these manufacturing firms’ financial downturns? 

Interpretive Response: Credit Union D should document its identification of the particular 

segments of its business and consumer loan portfolio for which it is probable that the 

sponsor manufacturing business’ financial downturn has resulted in loan losses. In addition, 

Credit Union D should document its analysis that resulted in the adjustments to the loss 

rates for the affected portfolio segments. As part of its documentation, Credit Union D 

maintains copies of the documents supporting the analysis, including relevant newspaper 

articles, economic reports, and economic data, and notes from discussions with individual 

member borrowers. 

Because in this case Credit Union D has had similar situations in the past, its supporting 

documentation also includes an analysis of how the current conditions compare to its 

previous loss experiences in similar circumstances. As part of its effective ALLL 

methodology, Credit Union D creates a summary of the amount and rationale for the 

adjustment factor, which management presents to the audit committee and board for their 

review and approval prior to the issuance of the financial statements. 
Supervisory Committee Guide, Change 1 

Appendices 

Chapter 11 

11-A-5 

Q&A #5 – ALLL Under FAS 5 – Estimating Losses on Loans Individually Reviewed for 

Impairment but Not Considered Individually Impaired 

Facts: Credit Union E has outstanding loans of $875,000 to Member Y and $725,000 to 

Member Z, both of which are paying as agreed upon in the loan documents. The credit 

union’s ALLL policy specifies that all loans greater than $700,000 must be individually 

reviewed for impairment under FAS 114. Member Y’s financial statements reflect a strong 

net worth, good profits, and ongoing ability to meet debt service requirements. In contrast, 

recent information indicates Member Z’s profitability is declining and its cash flow is tight. 

Accordingly, this loan is rated substandard under the credit union’s loan grading system. 

Despite its concern, management believes Member Z will resolve its problems and 

determines that neither loan is individually impaired as defined by FAS 114. 

Credit Union E segments its loan portfolio to estimate loan losses under FAS 5. Two 

of its loan portfolio segments are Segment 1 and Segment 2. The loan to Member Y 

has risk characteristics similar to the loans included in Segment 1 and the loan to 

Member Z has risk characteristics similar to the loans included in Segment 2.4 

In its determination of the ALLL under FAS 5, Credit Union E includes its loans to 

Member Y and Member Z in the groups of loans with similar characteristics (i.e., 

Segment 1 for Member Y’s loan and Segment 2 for Member Z’s loan). 

Management’s analyses of Segment 1 and Segment 2 indicate that it is probable that 

each segment includes some losses, even though the losses cannot be identified to 

one or more specific loans. Management estimates that the use of its historical loss 

rates for these two segments, with adjustments for changes in environmental factors 

provides a reasonable estimate of the credit union’s probable loan losses in these 

segments. 

Question: How does Credit Union E adequately support and document an ALLL 

under FAS 5 for these loans that were individually reviewed for impairment but are 

not considered individually impaired? 

Interpretive Response: As part of Credit Union E’s effective ALLL methodology, it 

documents the decision to include its loans to Member Y and Member Z in its determination 

of its ALLL under FAS 5. It also documents the specific characteristics of the loans that 

were the basis for grouping these loans with other loans in Segment 1 and Segment 2, 

respectively. Credit Union E maintains documentation to support its method of estimating 

loan losses for Segment 1 and Segment 2, including the average loss rate used, the 

analysis of historical losses by loan type and by internal risk rating, and support for any 

adjustments to its historical loss rates. The credit union also maintains copies of the 

economic and other reports that provided source data. 

Q&A #6 - Consolidating the Loss Estimates – Documenting the Reported ALLL 

 

4 These groups of loans do not include any loans that have been individually reviewed for impairment under 

FAS 114 and determined to be impaired as defined by FAS 114.
Supervisory Committee Guide, Change 1 

Appendices 

Chapter 11 

11-A-6 

Facts: Credit Union F determines its ALLL using an established systematic process. At the 

end of each period, the accounting department prepares a summary schedule that includes 

the amount of each of the components of the ALLL, as well as the total ALLL amount, for 

review by senior management, the Credit Committee, and, ultimately, the board of directors. 

Members of senior management and the Credit Committee meet to discuss the ALLL. 

During these discussions, they identify changes to be made to certain of the ALLL 

estimates. As a result of the adjustments made by senior management, the total amount of 

the ALLL changes. However, senior management (or its designee) does not update the 

ALLL summary schedule to reflect the adjustments or reasons for the adjustments. When 

performing their audit of the financial statements, the independent accountants are provided 

with the original ALLL summary schedule that was reviewed by management and the Credit 

Committee, as well as a verbal explanation of the changes made by senior management 

and the Credit Committee when they met to discuss the loan loss allowance. 

Question: Are Credit Union F’s documentation practices related to the balance of its loan 

loss allowance appropriate? 

Interpretive Response: No. A credit union must maintain supporting documentation for the 

loan loss allowance amount reported in its financial statements. As illustrated above, there 

may be instances in which ALLL reviewers identify adjustments that need to be made to the 

loan loss estimates. The nature of the adjustments, how they were measured or 

determined, and the underlying rationale for making the changes to the ALLL balance 

should be documented. Appropriate documentation of the adjustments should be provided 

to the board of directors (or its designee) for review of the final ALLL amount to be reported 

in the financial statements. For credit unions subject to external audit, this documentation 

should also be made available to the supervisory committee and its independent 

accountants. If changes frequently occur during management or committee reviews of the 

ALLL, management may find it appropriate to analyze the reasons for the frequent changes 

and to reassess the methodology the credit union uses. 
11-B-1 

Appendix 11-B --“Allowance for Loan Losses” Workpaper 

What is the 

purpose of this 

workpaper? 

This workpaper relates to answering question 3 (concerning 

charge-offs and recoveries) on the Allowance for Loan Losses 

Internal Control checklist (Appendix 11-C). 

By completing this workpaper, you will verify (or dispute) that the 

general ledger control account accurately reflects the loans 

charged off, recoveries on loans previously charged off, and the 

activity of management to maintain the account balance at a level 

commensurate with their computations of the amount needed for 

full and fair disclosure. 

What do we need 

to get started? 

Obtain a printout of the detailed monthly transactions taking place 

in the ALL during your audit period. The printout should have 

enough detail so that each entry can be identified and traced to the 

daily transaction activity. 

What do we look 

for when 

reviewing the 

ALL account 

activity? 

Each of the four columns provides information to address a specific 

internal control function: 

• Charge-offs: Each entry here should be traceable to an 

authorization by the board of directors.

• Recoveries: Payments received from loans previously 

charged off could be diverted into someone’s personal 

account. Receipts can be traced to the related recovery 

posting in this account to test for internal control of 

recoveries.
Supervisory Committee Guide 

Appendices 

Chapter 11 

11-B-2 

 

• PLL Adjustment: These entries replenish the ALL to the 

amount computed by management as needed for full and 

fair disclosure. Each ALL adjustment entry should be 

matched to each PLL expense entry. 

• Miscellaneous Debits and Credits: Rarely should you see 

anything in this column. Any such entry should be closely 

scrutinized to ensure irregularities are not being covered up 

by using this equity account. 
Appendix 11B ALLOWANCE FOR LOAN LOSSES

Credit Union: Ex Why Zee FCU 12/31/1996 Audit date

Transaction 

Month Charge-offs Recoveries

PLL

Adjustment

Misc. (DR)

and CR Balance Comments

 Begin at date of your last audit, record monthly through the current date: 100,000.00

JAN 100,000.00

FEB 0.00

MAR 0.00

APR 100,000.00

MAY 10,000.00 1,000.00 10,000.00 101,000.00

JUN 10,000.00 1,000.00 10,000.00 102,000.00

JUL 10,000.00 1,000.00 10,000.00 103,000.00

AUG 10,000.00 1,000.00 10,000.00 104,000.00

SEP 10,000.00 1,000.00 10,000.00 105,000.00

OCT 10,000.00 1,000.00 10,000.00 106,000.00

NOV 10,000.00 1,000.00 10,000.00 107,000.00

DEC 10,000.00 1,000.00 10,000.00 108,000.00

JAN 108,000.00

FEB 108,000.00

MAR 108,000.00

APR 108,000.00

MAY 108,000.00

JUN 108,000.00

JUL 108,000.00

AUG 108,000.00

SEP 108,000.00

OCT 108,000.00

NOV 108,000.00

DEC 108,000.00

Totals: 80,000.00 8,000.00 80,000.00 0.00 108,000.00

Balance of the A.L.L. (Account No. 719): 109,000.00

Difference: (1,000.00)

Describe actions by staff to correct difference:

NOTE: For help, refer to the workpaper discussion at the end of Chapter 11 of the SC Guide.

File: chptr11.xls
11-C-1 

Appendix 11-C -- Instructions for the Allowance for Loan and Lease Losses 

Checklist

What does this 

checklist 

accomplish? 

Completing this workpaper should give you a basic understanding 

about the control over ALLL activity by the credit union. The 

checklist is designed to be your primary guide for the valuation 

account audit. 

How do we 

complete this 

checklist? 

You will need to prepare a number of working papers in the 

process of answering some questions on the Checklist. We 

provide one sample workpaper in this chapter, attached as 

Appendix 11-B, to record and analyze activity in the ALLL over the 

audit period. 

About halfway through the checklist, you will gain a familiarity with 

the credit union’s system of internal controls. By the time you 

finish, you should be able to come to, and support, a conclusion of 

whether or not the ALLL represents a reasonable assessment of 

the loan portfolio’s value. 
Appendix 11-C -- Internal Controls Checklist: ALLL

File: chklst11.doc

Test Procedure Yes No 

11-C-2 

1. Are policies and 

procedures adequate? 

Review loan internal control checklist in 

Chapter 10. Review policies for collections 

and procedures for funding the ALLL Verify 

that practices follow the policies. [App 10-C] 

2. Is repossessed and 

sold loan collateral 

properly controlled? 

Test-check monthly board minutes for 

approval by, or reporting to, the board of 

directors. Loans should be segregated into 

a separate GL account, and not removed 

from the monthly report of delinquent loans. 

3. Are charge-offs and 

recoveries properly 

controlled? 

Cross-reference approval for a sample of 

charge-offs to the board minutes. Minutes 

should also show reviews of recoveries and 

of the delinquent loan list. 

4. Is the month-end 

delinquent loan list correct? 

Test-check some delinquent loans to 

confirm the delinquent loan report shows the 

correct number of months past due. Verify 

that due dates aren’t improperly advanced. 

5. Is the collection 

program active and 

effective? 

Test-check a sample of the collection work 

on delinquent loans. Compare practices 

with the collection policies. The records 

should illustrate that collection efforts are 

reasonably frequent and effective. 

6. Are loans turned over 

to outside collections 

properly controlled? 

Test-check to ensure that the loan balances 

are the same at the collection agencies and 

attorneys as at the credit union. Investigate 

any discrepancies. 
Appendix 11-C -- Internal Controls Checklist: ALLL

File: chklst11.doc

Test Procedure Yes No 

11-C-3 

7. Does management 

monitor loan officer and 

collector activity? 

Review monitoring practices with 

management to determine if supervisors 

regularly review reports of key areas. 

8. Is recordkeeping 

accurate? 

Record the monthly transactions to the ALLL 

on a working paper, such as the sample 

attached to this chapter of the Guide. 

Reconcile to the general ledger account for 

the ALLL. 
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 12 -- HOW DO WE AUDIT FIXED ASSETS?

12.01 What general ledger accounts are part of the fixed asset area?

12.02 What is the limit for fixed assets for a Federal Credit Union?

12.03 Why are internal controls over fixed assets important?

12.04 How does the supervisory committee review the internal controls over

fixed assets?

12.05 What are the audit objectives for fixed assets?

12.06 What are the audit procedures for fixed assets?

12.07 How do we review depreciation expense?

Appendices

12-A Internal Control Checklist: Fixed Assets.

12-B Sample Workpaper For Fixed Assets.

What general

ledger accounts

are part of the

fixed asset area?

12.01 The 770 series of accounts in the general ledger (as

discussed further in the Accounting Manual for Federal Credit

Unions) identify the fixed asset accounts used by the credit union.

Fixed asset accounts include:

• Land.

• Building.

• Furniture and equipment.

• Leasehold improvements.

• Leased assets under capital lease.

• Related allowances for depreciation.

• Allowances for amortization.
Supervisory Committee Guide

HOW DO WE AUDIT FIXED ASSETS?

Chapter 12

12-2

What is the limit

for fixed assets

for a Federal

Credit Union?

12.02 Federal credit unions with $1,000,000 or more in assets

are limited in fixed assets holdings to five percent of shares and

retained earnings. Lease payments on fixed assets are included

in this limit. Refer to §701.36 of the NCUA Rules and Regulations

for detail.

Why are internal

controls over

fixed assets

important?

12.03 Fixed assets must be adequately safeguarded to ensure

that controls exist to limit the opportunity for inappropriate use of

credit union assets.

How does the

supervisory

committee review

the internal

controls over

fixed assets?

12.04 To review the internal controls over fixed assets, you may

use the internal control check list in this Guide. The internal

control check list is included in the Appendix.

What are the

audit objectives

for fixed assets?

12.05 Your objectives are to determine if:

• Internal controls are adequate.

• Fixed asset subsidiary records are in balance with the

respective general ledger account.

• Fixed assets are properly recorded at cost and are properly

capitalized.

• Depreciation periods are reasonable and consistent with the

useful life of the asset.
Supervisory Committee Guide

HOW DO WE AUDIT FIXED ASSETS?

Chapter 12

12-3

• Depreciation/amortization charged to expense is reasonable

and consistent.

• Purchases and disposals in the audit period are properly

authorized and recorded.

• Adequate insurance coverage is in place.

• Fixed assets are properly classified on the statement of

financial condition.

What are the

audit procedures

for fixed assets?

12.06 To audit fixed assets, you:

• Review the internal control checklist for fixed assets. An

internal control checklist is provided in the Appendix.

• Complete a schedule summarizing fixed asset account

activity since the last audit date through the current audit

date. A sample workpaper, with instructions, is provided in

the Appendix to this chapter. You may use the workpaper

for your review of fixed assets. The purpose of the

workpaper is to summarize the account activity (purchases,

disposals, and depreciation). Alternatively, you may obtain

and use the general ledger account history for fixed assets

and depreciation expense (copies should be retained for

your workpapers).

• Review original invoices for significant fixed asset

purchases. Most credit unions maintain a file for fixed asset

invoices. Obtain the invoice file. Trace significant purchases

to the original invoice to determine if the item is recorded at

original cost. The invoice should be reviewed to determine if

the item purchased is a tangible asset which must be

capitalized. Costs which may not be capitalized are routine

repairs and maintenance expenses.
Supervisory Committee Guide

HOW DO WE AUDIT FIXED ASSETS?

Chapter 12

12-4

• Determine if significant fixed assets purchased are on site at

the credit union. This is accomplished by completing a

physical inventory of significant fixed assets. The inventory

should be completed to verify major acquisitions.

• Review board approval in the minutes for significant fixed

asset purchases and disposals. Board approval should be

documented in the minutes for major dollar amount

purchases. The same is true for disposals (sales or discard).

• Review depreciation expense recorded in the audit period.

Refer to section 12.07 in this Chapter.

• Test depreciation calculations for reasonableness and

consistency with the useful life of the asset. Refer to section

12.07 in this Chapter.

• Determine if the total amount of fixed assets complies with

the NCUA Fixed Asset Regulation, §701.36. If management

has exceeded this limit, management must prepare a fixed

asset waiver for submission to and approval by the NCUA

regional director, prior to exceeding the limit discussed in

paragraph 12.02 in this Chapter.

• Determine if insurance coverage is adequate for fixed

assets. Obtain the insurance policy. Compare the net book

value for each classification of fixed assets with the

insurance coverage amount on the policy. At a minimum,

fixed assets should be insured for the net book value

(original cost less accumulated depreciation). Insuring fixed

assets for replacement value is something to consider for

major assets, such as the building and computer equipment.

• Determine if fixed assets are accurately reported on the

statement of financial condition. This is accomplished by

tracing the accounts and balances reported on the general

ledger trial balance, to the statement of financial condition.
Supervisory Committee Guide

HOW DO WE AUDIT FIXED ASSETS?

Chapter 12

12-5

How do we

review

depreciation

expense?

12.07 Depreciation expense accounts are usually identified by

the following general ledger account numbers:

G.L. #254 - Depreciation - Building.

G.L. #255 - Amortization of Leasehold Improvements.

G.L. #257 - Depreciation Expense for Leased Assets.

G.L. #266 - Depreciation of Furniture and Equipment.

You review the general ledger account history for the depreciation

expense accounts. Assess whether or not depreciation expense

is consistently applied. For example, most credit unions record

depreciation expense monthly; therefore, depreciation expense

should be recorded in the general ledger each month.

If significant fluctuations are noted, expand your review to

determine the reasons why depreciation expense is not

consistently recorded.

Common Depreciation Method. Most credit unions depreciate

fixed assets using the “straight line” method.

An example of the “straight line” method is:

A computer is purchased for $4,200 and management has

selected a depreciation term of 36 months. Salvage value

(SV) is estimated at $600.

The depreciation expense is determined by dividing the

cost of the computer less SV by the number of months

in the depreciation term:

$(4,200-600)/ 36 months = $100 per month.

Depreciation Terms. Fixed assets are required to be depreciated

over their useful lives. Leasehold improvements are required to

be amortized over the term of the lease.
Appendix 12-A -- Internal Control Checklist: Fixed Assets

The following checklist should help you identify significant internal control

and operating weaknesses, if any. You may find additional guidance in the

AICPA’s “Audits of Credit Unions” and/or the AICPA’s “Credit Union Audit

Manual.”

Test Procedure Yes No

1. Are fixed asset

subsidiary records in

balance with the

respective general

ledger accounts?

Compare audit date totals on the subsidiary

records with the audit date general ledger

totals.

2. Is an annual fixed

asset inventory

completed by an

individual who is not

involved in fixed

asset accounting?

Determine if an employee, not involved with

fixed asset accounting, or a supervisory

committee member completes a fixed asset

inventory to ensure that all fixed assets on

the credit union books are on site in the

credit union.

3. Is a reasonable

depreciation term

policy in place?

Verify that a written board approved policy

addresses guidelines for fixed asset

depreciation terms.

4. Is a dollar policy limit

in place to authorize

management to

purchase fixed

assets?

Verify that the board has an approved

policy limit which allows management to

purchase a fixed asset below a certain

dollar amount without board approval.

5. Is board of director

approval required for

fixed asset purchases

above a certain dollar

amount?

Verify that fixed asset purchases above a

certain dollar amount requires board

approval to control large purchases and

expenditures.

6. Are original sales

invoices maintained

to document the cost

basis of the asset?

Review original sales invoices to document

the purchase price of the fixed asset.
Appendix 12-A -- Internal Control Checklist: Fixed Assets

Test Procedure Yes No

12-A-2

7. Is fixed asset

insurance coverage

adequate?

Review the amount of insurance coverage

in relation to the net book value and/or the

replacement cost for computer equipment,

furniture and equipment, and building, if

applicable.

8. Are vehicles, land,

and building (if

applicable) titled in

the name of the credit

union?

Review the title for applicable assets which

document ownership interest with a title.

Ensure that the credit union is listed as the

owner on the title.

9. Are competitive bids

requested and

reviewed before

making a significant

purchase?

Determine if significant purchases are made

through a competitive bidding process. It is

a sound business practice to require a

minimum of three bids before making a

large dollar fixed asset purchase.
Supervisory Committee Guide

Appendices

Chapter 12

Appendix 12-B -- Instructions for Fixed Asset Workpaper

How do you

complete the

sample work

paper provided

for fixed

assets?

You complete the following steps:

a) List the general account number for the accounts audited in

column 1.

b) List the date management purchased the fixed asset in

column 2. You obtain the purchase date from the general

ledger account history.

c) List the cost of the fixed asset in column 3. You obtain the

cost of a fixed asset purchase by reviewing the debit entries

on the fixed asset general ledger account history.

d) List a brief description of the fixed asset purchased in

column 4.

e) List the depreciation term in months in column 5. Determine

if the depreciation term is reasonable. Refer to the

Accounting Manual for Federal Credit Unions, fixed asset

section, if you need additional information for depreciation

term guidelines.

f) Review the original invoice for the fixed asset purchased.

Enter a “Y” for yes in column 6 after you complete this.

g) If the fixed asset item purchased is a significant item for

your credit union, verify in the board meeting minutes that

the board approved this item. Enter a “Y” for yes to

document board approval, or a “N/A” for not applicable if the

item was not a significant dollar amount purchase.

h) If the acquired fixed asset is significant, determine if the

fixed asset is on hand at the credit union. If you verify that

the fixed asset is on hand at the credit union, enter a “Y” for

yes in the column. You don't need to complete this

procedure for items purchased for a relatively small dollar

amount.
FIXED ASSETS WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. 

Number

Date 

Purchased Cost Description

Depreciation 

term

Reviewed

Invoice (Yes 

or No)

Date board 

approved

Observed

Asset (Yes or 

No)

0 1/1/96 $3,600 personal computer 36 Y 12/1/95 Y

File: chptr12a.xls
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 13 -- HOW DO WE AUDIT “OTHER ASSETS”?

13.01 What general ledger accounts are part of the “Other Assets” account

group?

13.02 How do we review the internal controls over “Other Assets”?

13.03 What are the audit objectives for “Other Assets”?

13.04 What are the audit procedures for “Other Assets”?

Appendices

13-A Internal control checklist: Other Assets.

13-B Sample confirmation letter for other asset accounts.

13-C Sample work paper -- Other Asset accounts audited.

What general

ledger accounts

are part of the

“Other Assets”

account group?

13.01 The “Other Assets” account group includes several

account classification categories:

• #720 series -- Other Receivables.

• #760 series -- Prepaid Expenses.

• #780 series -- Accrued Income.

• #790 series -- Other Assets, Assets Acquired in Liquidation

of Loans, and Other Real Estate Owned

(OREOs).

How do we

review the

internal controls

over “Other

Assets”?

13.02 You must review internal controls surrounding “Other

Assets" and perform tests of controls.

Other Receivable and Other Asset accounts may include: ACH,
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER ASSETS”?

Chapter 13

13-2

ATM, payroll deductions receivable, non-post draft accounts, and

suspense accounts. If your credit union has these accounts, you

must complete a thorough review to determine that the balances

of these accounts carry no potential losses.

One of the primary accounting concerns with “Other Assets” is

whether current and accurate account reconcilements exist. The

other concern is whether or not amounts in the accounts are

properly clearing. With the wide variety, and in some cases, high

dollar balance in these accounts, sound accounting practices are

necessary for fairly stated financial statements.

You may use the Other Asset internal control checklist in this

Guide.

What are the

audit objectives

for “Other

Assets”?

13.03 You should determine if:

720s -- Other Receivables.

• Internal controls are adequate.

• Adequate accounting records exist.

• The assets are properly classified on the statement of

financial condition.

760s -- Prepaid Expenses.

• Internal controls are adequate.

• Adequate accounting records exist.

• The write-off period is reasonable.

• The balance in the account represents costs that will benefit

future periods.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER ASSETS”?

Chapter 13

13-3

• Prepaid expenses are properly classified on the statement

of financial condition.

780s -- Accrued Income.

• Internal controls are adequate.

• Adequate accounting records exist.

• Accrued interest receivable on loans and accrued income

receivable from investments are fairly stated.

• Accrued income receivable accounts are properly classified

on the statement of financial condition.

(You may refer to Chapter 10 -- Loans and Chapter 9 --

Investments for more audit information on these accounts.)

790s -- Other Assets.

• Internal controls are adequate.

• Adequate accounting records exist.

• Assets Acquired in Liquidation of Loans and Other Real

Estate Owned (OREO’s) are carried on the books at the

lower of cost or current fair value.

• The credit union is listed as the owner on the title of assets

acquired in liquidation.

• Sales of Assets Acquired in Liquidation of Loans and

OREO’s are properly recorded.

• “Other Assets” are properly classified on the statement of

financial condition.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER ASSETS”?

Chapter 13

13-4

What are the

audit procedures

for “Other

Assets”?

13.04 You should:

720s -- Accounts Receivable

• Review the “Other Assets” internal control checklist.

• Review the account reconcilement for Accounts Receivable

as of the audit date.

• Foot the reconcilement.

• Trace significant amounts listed on the reconcilement to the

general ledger history report.

• Trace significant amounts listed on the account

reconcilement to supporting documentation (invoices or

other source documents).

• Review the general ledger account history for the month

subsequent to the audit date to determine if significant

amounts are clearing properly.

760s -- Prepaid Expenses.

• Review the “Other Assets” internal control checklist.

• Trace the balance of the subsidiary records to the general

ledger as of the audit date.

• Review a sample of original invoices for significant dollar

amount prepaid expenses recorded in the audit period.

• Review the write-off period in relation to the cost benefit

period of the prepaid expense.

• Test a sample of monthly write-off calculations.

• Test a sample of prepaid expense write-offs to the

applicable operating expense account.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER ASSETS”?

Chapter 13

13-5

780s -- Accrued Income.

• Review the internal control checklists in the Loan (Chapter

10) and Investment (Chapter 9) general ledger chapters.

• Trace the balance of accrued interest receivable on loans to

supporting documentation.

• Test the calculation of accrued interest receivable on a

sample of loan accounts.

• Review the schedule for accrued income receivable from

investments and test a sample of individual accrual

calculations for reasonableness. Include testing of large

balance accruals.

790s -- Other Assets.

• Review the “Other Assets” internal control checklist.

• Review the account reconcilement for other assets and

trace amounts to supporting documentation.

• Confirm significant amounts for other asset accounts, if

applicable (for example, credit card company clearing

deposit accounts, CUSO deposits). Refer to the Appendix

at the end of this chapter for a sample confirmation letter.

You may use this letter to confirm account balances for

applicable other asset accounts.

• Obtain the account reconcilements for Assets Acquired in

Liquidation of Loans and OREO’s (if these assets are

applicable to your credit union).

⇒ Review the most recent appraisal.

⇒ Ensure that the asset is recorded at the lower of cost or

fair value, less any costs to sell the asset.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER ASSETS”?

Chapter 13

13-6

⇒ Examine evidence of title, paid property taxes, and

current insurance.

• Review documentation for sales of Assets Acquired in

Liquidation and OREO’s for proper accounting treatment.
Appendix 13-A -- Internal Control Checklist: Other Assets

The following checklist should help you identify significant operating and

internal control weaknesses over “Other Assets”, if any. You may find

additional guidance in the AICPA’s “Audits of Credit Unions” and/or “Credit

Union Audit Manual.”

Test Procedure Yes No

Accounts Receivable:

1. Is board of director

approval required prior

to writing off any

balance in an account

receivable?

Review the policies and practices for this

area. Every collection effort should be

made to avoid accounting losses.

2. Are adequate

subsidiary records/

reconcilements

completed monthly?

Review the reconcilements for the last three

months to determine if the reconcilements

are prepared consistently each month.

3. Are accounts

receivable

reconcilements

periodically reviewed

by an individual who

usually does not

prepare the

reconcilement?

Inquire with management or the accounting

department to determine if this internal

control check and balance is in place and

functioning adequately.

4. Do account receivable

reconcilements

balance with the

general ledger and

clear properly?

Determine during the review of the

accounting records whether or not

individual items in the accounts receivable

general ledger accounts:

• Clear within 90 days.

• Are properly documented to support

their existence?

• Should be expensed if not collectible?
Appendix 13-A -- Internal Control Checklist: Other Assets

Test Procedure Yes No

13-A-2

Prepaid Expense:

1. Are subsidiary records

in balance with the

general ledger?

Trace subsidiary records to the general

ledger for the audit date.

2. Are original invoices

maintained for review?

Request and review a sample of original

invoices.

3. Are write-off periods

reasonable for prepaid

expenses?

Determine if the write-off periods are proper

in relation to the expected future benefit of

the prepaid item.

4. Are prepaid expense

subsidiary records

periodically reviewed

by an individual who

usually does not

maintain the accounts?

Inquire with management or the accounting

department to determine if this internal

control check and balance is in place and

functioning adequately.

Other Assets, Assets Acquired in Liquidation and OREO:

1. Are adequate

subsidiary records and

reconcilements

completed monthly?

Determine during the review of the

accounting records.

2. Do the subsidiary

records balance with

the general ledger as

of the audit date?

Trace the subsidiary records to the general

ledger balance as of the audit date.
Appendix 13-A -- Internal Control Checklist: Other Assets

Test Procedure Yes No

13-A-3

3. Does management

have a written policy to

record/carry assets

acquired in liquidation

and OREOs at the

lower of cost or fair

value?

Review the policy and verify a sample of

files to determine proper accounting for

these assets.

4. Does the credit union

have legal title to the

assets acquired in

liquidation and

OREOs?

Review the files for a sample of applicable

assets.

5. Are accounting records

for assets acquired in

liquidation and OREOs

periodically reviewed

by an individual who

does not usually

maintain these

records?

Inquire with management or the accounting

department to determine if this internal

control check and balance is in place and

functioning adequately.

Note: Questions for the general ledger accounts relating to the accrued

income receivable on loans and the accrued income receivable on

investments are in the loan (Chapter 10)and investment (Chapter 9) chapters,

respectively.
Appendix 13-B -- SAMPLE CONFIRMATION

LETTER FOR “OTHER ASSET” ACCOUNTS

___________________________ Credit Union

___________________________

___________________________

___________________________

___________________________

___________________________

___________________________

Date_________________

Re: Account no.________________

Dear Sir or Madam:

The supervisory committee of the ________________ Credit Union is conducting an audit

of the books and records. Please confirm the balance for the asset/deposit account

number listed above, as of ____________. A stamped self addressed envelope is

enclosed for your reply. Please respond directly to the Supervisory Committee. Thank you

in advance.

Sincerely,

__________________________

Supervisory Committee member,

_______________ Credit Union

Authorized signature:

__________________________

Manager/CEO

_______________ Credit Union

Account balance $_________

Confirmed by company representative:

_________________________ _______________ ___________

Representative’s signature Title Date
Appendix 13-C -- Workpaper Instructions: “Other Assets”

How do you

complete the

workpaper

provided for

Other Assets?

a) List the general account number for the accounts audited in

column 1.

b) List the general ledger account description or account title in

column 2.

c) List the general ledger balance as of the audit date in col. 3.

d) If an account reconcilement is available/applicable for the

account under review, test the reconcilement:

• Foot the reconcilement and trace the general ledger

balance to the general ledger trial balance as of the audit

date.

• Trace significant amounts on the reconcilement to

supporting documentation.

• Trace significant amounts on the reconcilement to the

general ledger history. (The reconcilement should

include a reference date to help locate the date of the

general ledger entry).

• After completing the reconcilement testing procedures,

enter a “Y” for yes in column 4, “tested reconcilement”.

e) Complete applicable audit procedures stated in the

Supervisory Committee Guide, Chapter 13, for the account

under review.

f) After completing the audit procedures, enter a “Y” for yes in

column 5, “completed audit procedures”.

g) If a finding is noted based on the audit of the account, place

a “Y” for yes in column 6 “reportable condition”. Reportable

conditions include internal control weaknesses which

management should address based on the judgment of the

supervisory committee member completing this part of the

audit.
OTHER ASSET ACCOUNTS WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. 

No. Description of Asset G.L. Balance Tested Reconcilement

Completed 

Audit 

Procedures

Exception 

(Yes or No)

0 WWW 25.00 $ Y Y N

File: chptr13a.xls
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §§715.

Chapter 14 -- HOW DO WE AUDIT “OTHER LIABILITIES”?

14.01 What general ledger accounts are included in the “Other Liabilities”

category?

14.02 How do we review the internal controls over “Other Liabilities”?

14.03 What are “Contingent Liabilities”?

14.04 What are suspense accounts?

14.05 What are the audit objectives for “Other Liabilities”?

14.06 What are the audit procedures for “Other Liabilities”?

Appendices

14-A Internal control checklist: “Other Liabilities”.

14-B Sample attorney letter confirmation.

14-C Sample work paper - Summary of accounts audited.

What general

ledger accounts

are included in

the “Other

Liabilities”

category?

14.01 The following accounts are included in the “Other

Liabilities” account category:

#800 series - Accounts Payable.

#820 series - Dividends Payable.

#830 series - Interest Refunds Payable.

#840 series - Taxes Payable.

#850 series - Accrued Expenses.

#860 series - Other Liabilities.

#870 series - Unapplied Data Processing Exceptions.

#880 series - Deferred Credits.

How do we

review the

internal controls

over “Other

Liabilities”?

14.02 You must review internal controls surrounding “Other

Liabilities” and perform tests of controls. You must also complete

audit testing similar to that discussed and set forth in the chapter

including attached workpapers. Further guidance relative to these
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER LIABILITIES”?

Chapter 14

14-2

overall objectives is provided in Chapter 7, “What Steps Must We

Take to Complete the Audit Ourselves.”

You may use the internal control checklist in this Guide.

You also must consider Contingent Liabilities and suspense

accounts. These latter two items we will address next before

discussing audit objectives and procedures.

What are

Contingent

Liabilities?

14.03 Contingent liabilities are estimated probable future

expenses which must be accrued for in accordance with generally

accepted accounting principles. An example of a contingent

liability which may be encountered in a credit union audit is a loss

contingency due to pending or threatened litigation (lawsuit).

An audit procedure to verify the existence of pending litigation is

to mail an attorney letter to all attorneys used by the credit union.

Refer to the sample attorney letter in the appendix to this chapter.

The attorney should respond directly to the supervisory

committee.

What are

suspense

accounts?

14.04 Suspense accounts are used to hold unposted

transactions in a separate account until the credit union can

process the transactions to the member accounts. Suspense

accounts may be established for the following:

• Unposted insurance premium withdrawals.

• Unposted share drafts.

• Unposted payroll deposits and transfers.

• Unposted automated clearing house (ACH) transactions.

• Unposted automated teller machine (ATM) transactions.

Suspense accounts are generally thought of as higher audit risk

general ledger accounts since the volume and dollar amount of

transactions may be high. The potential for an accounting

problem may exist in these accounts if the account is not properly
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER LIABILITIES”?

Chapter 14

14-3

maintained. One audit risk with suspense accounts is that

unposted items may accumulate and conceal problems, such as

negative share accounts or GL out-of-balance conditions.

It is a good auditing practice to perform a thorough review of all

suspense accounts. Suspense accounts with a relatively low

dollar balance must be reviewed since the posting of large debits

and credits in the account may net to an insignificant account

balance; however, the individual items that lead to the balance

may be significant. Trace entries to (and from) the account, and

fully reconcile the remaining balance as of the audit date. Items in

this account which are not resolved and are over one month old

should be appropriately documented.

If the supervisory committee has any doubts when reviewing

suspense account reconcilements or activity, please seek

professional outside accounting or auditing expertise.

What are the

audit objectives

for Other

Liabilities?

14.05 You must determine if:

• Internal controls are adequate.

• Adequate accounting records exist for other liability

accounts.

• Liability accounts represent authorized obligations of the

credit union.

• Liability accounts are established for all estimated future

expenses and contingencies as of the audit date.

• Other liability accounts are properly classified on the

balance sheet.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER LIABILITIES”?

Chapter 14

14-4

What are the

audit procedures

for Other

Liabilities?

14.06 You must:

#800s - Accounts Payable.

• Review the Other Liabilities internal control checklist.

• Review the reconcilement for accounts payable as of the

audit date.

• Trace a sample of significant amounts recorded on the

reconcilement to supporting documentation.

• Review the general ledger account activity subsequent to

the audit date to determine timely payment or clearing of

the account balance.

• Review a sample of invoices to determine if invoices are

properly approved, marked paid, and are paid in the proper

time period.

• Determine if all known significant expenses are recognized

as of the audit date by reviewing expenses paid subsequent

to the audit date.

#820s - Dividends Payable.

• Review the Other Liabilities internal control checklist.

• Review the frequency of dividend payments for all share

types offered by the credit union.

• Ensure that the dividends payable accounts for all share

types are fairly stated for dividends earned and not yet paid,

based on the board approved dividend rate, as of the audit

date.

• Refer to Chapter 16 in this Guide, “How do we audit

Member Shares?” for more information.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER LIABILITIES”?

Chapter 14

14-5

In computerized credit unions:

• Review the input of dividend payment information into the

EDP system program for accuracy and compliance with

board approved dividend rates.

In manual credit unions:

• Test a sample of dividend calculations for individual

member accounts for accuracy.

#830s - Interest Refunds Payable. First, determine if the credit

union offers a loan interest refunds payable program. (Most credit

unions don’t have this type of program). If the credit union has

this type of program:

• Review the Other Liabilities internal control checklist.

• Reference the board meeting minutes for approval of the

loan interest refunds program.

• Review the accrued liability general ledger account and

determine if the liability for the estimated loan interest

refunds payable is reasonable as of the audit date.

• Review the balance and activity in general ledger account

No. 119, Interest Refunds, and determine if the balance and

activity appear reasonable.

#840s - Taxes Payable.

• Review the Other Liabilities internal control checklist.

• Review the taxes payable general ledger accounts as of the

audit date and trace the account balance to the credit union

payroll records and/or the payroll tax returns.

• Review a sample of payroll tax payments (check

disbursements) to ensure that payroll taxes are paid

promptly.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER LIABILITIES”?

Chapter 14

14-6

• Review a sample of payroll tax returns to determine that

payroll tax returns are filed as required by state and federal

regulations.

#850s - Accrued Expenses.

• Review the Other Liabilities internal control checklist.

• Review the subsidiary records for accrued expenses for

reasonableness and agreement with the total in the GL.

• Determine that accrued expense accounts are established

for known liabilities and contingencies.

• Review the need for the following accrued expense

accounts related to employee benefits:

⇒ Accrued unused vacation and sick pay (if applicable);

⇒ Accrued employee post retirement benefits (if applicable)

⇒ Accrued pension plan liability (if applicable).

• Review a sample of significant payments made from

accrued expense accounts.

• Determine if accrual rates are reasonable and consistent

with the amount and expected date of the payout of the

liability.

#860s - Other Liabilities.

• Review the Other Liabilities internal control checklist.

• Review the reconcilement as of the audit date for Other

Liabilities.
Supervisory Committee Guide

HOW DO WE AUDIT “OTHER LIABILITIES”?

Chapter 14

14-7

• Trace significant amounts listed on the reconcilement to

supporting documentation.

• Review the general ledger activity subsequent to the audit

date to determine if Other Liabilities are properly clearing.

#870s - Unapplied Data Processing Exceptions.

• Review the Other Liabilities internal control checklist.

• Review the reconcilement as of the audit date for unapplied

data processing exceptions.

• Trace significant amounts listed on the reconcilement to

supporting documentation. The supporting documentation

will relate to the type of general ledger account. (For

example, transactions related to these accounts may be

from ATM, ACH, or payroll deductions. Unapplied data

processing exception accounts relate to member account

activity; therefore, it is particularly important for these

accounts to be reconciled and cleared timely).

#880s - Deferred Credits.

• Review the Other Liabilities internal control checklist.

• Determine if the credit union has any deferred credit

general ledger accounts. Refer to the Accounting Manual

for Federal Credit Unions, pages 4-120 to 4-126 for

additional information.

• Review the subsidiary records for deferred credit general

ledger accounts (accounts related to income received but

not yet earned) and determine if the total is in agreement

with the total in the GL.

• Determine that debits to the deferred credit account and

credits to the income in the audit period are appropriate,

based on testing. (Income recorded as it is earned).
Appendix 14-A -- Internal Control Checklist: Other Liabilities

The following checklist should assist you in evaluating operating and internal

controls over “Other Liabilities”. You may find additional guidance in the

AICPA’s “Audits of Credit Unions” and/or “Credit Union Audit Manual.”

Test Procedure Yes No

1. Are adequate

subsidiary records

maintained for all

liability accounts?

Verify that a reconcilement, supporting

schedule or work paper is prepared for all

liability general ledger accounts.

2. Is adequate

documentation

maintained for

payments/entries on

payable and accrued

expense accounts?

Verify that original invoices, data processing

reports, etc. are retained for review to

support entries made in the accounting

records.

3. Are all known liabilities

as of the audit date

recorded on the

general ledger?

Review with management. Some of the

types of liabilities to be aware of are:

accrued unused vacation and sick pay for

employees, accrual for employee post

retirement benefits, and accrual for legal

expenses.

4. Are accounts payable

and accrued expenses

reconciled by an

individual not directly

involved in the

payment of expenses?

Review with management.

5. Are all liability accounts

reconciled in writing at

least monthly?

Review with management.

6. Do individual items in

suspense general

ledger accounts clear

within 30 days?

Review with management. A “no” answer

indicates a cause of concern since

accounting problems may exist if suspense

accounts do no clear timely.
Appendix 14-A -- Internal Control Checklist: Other Liabilities

Test Procedure Yes No

14-A-2

7. Are payroll tax returns

completed and filed on

time?

Review the most recent payroll tax returns.

8. Are all invoices

properly approved

before payment?

Review a sample of invoices and original

checks or check copies to determine if

approval and check disbursement activities

are separate (if possible) -- segregation of

duties.

9. Are bank accounts

reconciled by someone

independent of the

check signer?

Verify the independence of reconcilement

and check signature functions. Check

signers should not be the primary person to

reconcile the bank account.
Appendix 14-B -- SAMPLE ATTORNEY LETTER CONFIRMATION

_________________

_________________

_________________

_________________

_________________ Credit Union

_________________

_________________

_________________

Date , 19__

The supervisory committee of the _____________ Credit Union is completing the annual

audit as of __________ __, _____ of the financial statements. Please provide the

information requested below directly to the supervisory committee.

Pending or threatened litigation, claims and assessments:

Please provide a list of all pending or threatened litigation, claims or assessments your firm

is handling on our behalf, including the following: (1) the nature of the litigation (including

the amount of monetary or other damages sought); (2) current status of the case to date,

(3) how management is responding or intends to respond to the litigation, and (4) an

evaluation of the likelihood of an unfavorable outcome and an estimate, if possible, of the

amount or range of potential loss.

Sincerely,

_____________________

Authorized signature,

Manager, ____________ Credit Union
1

Appendix 14-C -- Workpaper Instructions -- “Other Liabilities”

How do you

complete the

workpaper

provided for

Other Liabilities?

a) List the general ledger account number for the accounts

audited in column 1.

b) List the general ledger account description or account title in

column 2.

c) List the general ledger balance as of the audit date in col. 3.

d) If an account reconcilement is available/applicable for the

account under review, test the reconcilement.

• Trace the general ledger balance on the reconcilement to

the general ledger trial balance as of the audit date.

• Foot the reconcilement.

• Trace significant amounts on the reconcilement to

supporting documentation.

• Trace significant amounts on the reconcilement to the

general ledger history; the reconcilement should include a

reference date to help locate the date of the general

ledger entry.

• After completing the reconcilement testing procedures,

enter a “Y” for yes in column 4, “tested reconcilement”.

e) Complete applicable audit procedures as outlined in this

chapter for the account under review.

f) After completing the audit procedures, enter a “Y” for yes in

column 5, “completed audit procedures”.

g) If a finding is noted based on the audit of the account, place

a “Y” for yes in column 6 “reportable condition”. Reportable

conditions are findings which should be included in the final

audit report, based on the judgment of the supervisory

committee member completing this part of the audit.
OTHER LIABILITY ACCOUNTS WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. No. Description of 

Liability G.L. Balance Tested 

Reconcilement

Completed Audit 

Procedures

Exception 

(Yes or No)

0 xxx 44.00 $ Y Y N

File: chptr14.xls
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

CHAPTER 15 -- HOW DO WE AUDIT “BORROWED FUNDS”?

15.01 To help us get started, could you give us some background on

“Borrowed Funds”?

15.02 What are our audit objectives?

15.03 What are our audit procedures?

15.04 How do we evaluate and test internal controls?

15.05 How do we verify interest on “Borrowed Funds”?

Appendices

15-A Internal Control Checklist: Borrowed Funds.

15-B Borrowed Funds Confirmation Sample.

To help us get

started, could

you give us some

background on

“Borrowed

Funds”?

15.01 Need for Borrowed Funds. Like other businesses, credit

unions may need to borrow periodically to meet their short-term

operational needs. Credit unions may also borrow funds to

finance fixed assets. This is not common due to the expense

involved.

In most cases, the credit union should not rely heavily on

borrowing. Borrowed Funds are an expensive source of liquidity.

If management uses them frequently, they should be able to

adequately explain the practice.

There are reasons for borrowing funds, other than simple liquidity

or financing assets (for example, investment account

relationships). In these cases, verifying the Borrowed Funds

becomes more complex. A detailed discussion of these

relationships is beyond the scope of this guide. You should refer

to the AICPA’s industry guide, Audits of Credit Unions, or an

outside accountant, for assistance in these cases.
Supervisory Committee Guide

HOW DO WE AUDIT “BORROWED FUNDS”?

Chapter 15

15-2

Structuring of Notes. Generally, issuers structure notes in three

ways:

a) Line-of-credit. Most credit unions establish lines-of-credit to

provide a ready source of funds to cover temporary cash

needs. This type of loan carries a specific limit set by your

board. It typically allows management to access the funds

in the amount needed, whenever needed, up to the

established limit. A line-of-credit is usually associated with

a processing account.

b) Installment Note. A note could require regular payments,

much as a consumer loan.

c) Balloon Note. A note could also require a lump sum

payment, at a specified future date (maturity). Management

should have a definite source of liquidity for the payment

and should not continually need to renew the balloon note.

Source of Borrowed Funds. Typically, a credit union will hold a

line-of-credit with a corporate credit union. Other sources include

banks and thrifts.

What are our

audit objectives?

15.02 Your audit objectives are:

a) Review internal controls.

b) Verify that Borrowed Funds are properly authorized and are

obligations of the credit union.

c) Verify proper recording and reporting of Borrowed Funds

and interest on Borrowed Funds.

d) Determine whether or not all off-balance-sheet obligations

(e.g., operating leases or guarantees) have been identified

and considered.
Supervisory Committee Guide

HOW DO WE AUDIT “BORROWED FUNDS”?

Chapter 15

15-3

What are our

audit

procedures?

15.03 Your audit procedures are:

a) Evaluate and test internal controls to identify weaknesses.

b) Review board authorization for outstanding lines-of-credit,

or other notes payable (management should be able to

provide a copy of the board minutes that reflect

authorization, if not already in the loan file).

c) Review supporting documentation (for example, notes,

borrowing agreements, etc.). Verify:

• Maturity.

• Interest rate.

• Underlying collateral.

• Existence and compliance with any other requirements

listed in the supporting documentation.

c) Review account activity, to determine if the credit union is

relying on Borrowed Funds to support operations. If so,

management should be able to explain adequately why this

is necessary.

d) Confirm the Borrowed Funds with the issuing institution.

We have included a sample form in the appendix to this

chapter.

e) Verify the accuracy of the interest on borrowed money.

How do we

evaluate and test

internal controls?

15.04 Complete the internal control checklist located in the

appendix to this chapter. You will obtain answers from

discussions with staff, and through reviewing appropriate

documentation.
Supervisory Committee Guide

HOW DO WE AUDIT “BORROWED FUNDS”?

Chapter 15

15-4

How do we verify

interest on

Borrowed

Funds?

15.05 The institution holding the note will generally list at least

year-to-date interest paid on the credit union’s statement. If not

listed on the statement, estimate the amount owed. Multiply an

approximate average amount outstanding, by the interest rate (or

an average if the note has a variable rate) to arrive at an annual

estimated interest amount. Then convert this figure into the

number of months in the current period. Also be sure to verify last

year’s interest, if covered by your audit period.
Appendix 15-A -- Internal Controls Checklist: Borrowed Funds

The following checklist will assist you in evaluating the credit unions operating and

internal controls. You may find additional guidance in the AICPA’s “Audits of

Credit Unions” and/or “Credit Union Audit Manual.”

Internal Controls:

Test Procedure Yes No

1. Are borrowing

transactions

reviewed and

approved by the

board of directors?

Determine if Board minutes reflect

proper authorization for all borrowings.

2. Are adjustments to

borrowed funds

reviewed and

approved by

management?

Determine whether the procedures for

obtaining additional funds, and the

approval for obtaining the funds is

sound.

3. Is the statement that

reflects borrowed

funds activity

reconciled to the

general ledger?

Determine whether staff timely

reconciles the borrowed funds

subsidiary with the general ledger. They

should be monitoring activity in the

account.

4. Is interest expense

properly accrued and

reported?

Verify computation, accounting and

reporting of interest expense.
Appendix 15-A -- Internal Controls Checklist: Borrowed Funds

Test Procedure Yes No

15-A-2

Auditing Procedures:

Refer to the Chapter 15 for additional explanation on these procedures.

1. How do I verify the

accuracy of the

amount of borrowed

funds?

Trace the balance in the general ledger

account to the corresponding statement

from the lender.

2. What should I look

for when reviewing

the loan documents?

Verify maturity and interest rate. Review

the underlying collateral, and existence

and compliance with any other

requirements listed in the loan

documents.

3. Should I review

account activity?

Yes. Reviewing activity will help you

determine if the credit union is relying

on borrowed funds for liquidity.

4. How do I confirm the

borrowed funds?

Send a confirmation notice to the

institution issuing the note. Follow-up

within several weeks if you do not hear

back.

5. How do I verify the

interest on borrowed

money?

In many cases, you can verify interest

paid this year with the statement from

the institution. Also verify that the

balance is reasonable for loan activity

and interest rates.
Supervisory Committee Guide

HOW DO WE AUDIT “BORROWED FUNDS”?

Appendix 15-B

15B-1

(USE THE CREDIT UNION’S LETTERHEAD)

BORROWED FUNDS CONFIRMATION

(DATE)

(NAME AND ADDRESS OF INSTITUTION)

Dear (NAME OF AGENT):

Our supervisory committee is conducting an audit of our financial statements. In that

regard, please confirm the following outstanding balance on our note which our records

indicate that you held on (FINANCIAL STATEMENT DATE).

Please compare this information with your records and complete the section below,

regardless of whether it agrees with your records. After signing and dating your reply,

please mail it directly to the supervisory committee in the enclosed reply envelope.

Thank you in advance for your prompt reply.

Sincerely,

(MANAGEMENT’S NAME/POSITION)

(NAME OF CREDIT UNION)

(LIST NOTE PAYABLE INFORMATION HERE, OR ATTACH TO THIS LETTER.

INCLUDE:

• TYPE OF BORROWED FUNDS (NOTE OR LINE-OF-CREDIT),

• AMOUNT OUTSTANDING,

• MATURITY DATE,

• INTEREST RATE, AND

• UNDERLYING COLLATERAL)

The (above OR attached) agrees with our records as of (FINANCIAL STATEMENT

DATE), with the following exceptions:

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

Signed: _____________________________________ Date ___________________

(Name and Title/Position)
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations 715.

Chapter 16 -- HOW DO WE AUDIT “SHARES”?

16.01 What is our audit objective?

16.02 What do we look for in reviewing policies and procedures?

16.03 What audit procedures must we perform to test these internal controls?

16.04 How do we audit the record keeping?

16.05 Could you discuss with us the sample workpapers appended to this

chapter?

Appendices

16-A Internal Control Checklist: Shares.

16-B Trial Balance of Members Shares Workpaper.

What is our audit

objectives?

16.01 You must review the internal control policies and procedures in place to safeguard member’s shares. Internal controls

should be adequate to ensure that:

a) Members’ shares and savings accounts accurately reflect all

their ownership interests in the credit union.

b) Accounts are properly valued, classified, described, and disclosed.

Financial statement presentation is subject to both RAP and

GAAP considerations. Federal credit unions with assets greater

than $10 million must report shares on their call report as liabilities.1

 All others may report members’ shares consistent with either GAAP (liabilities) or RAP (equity).

 

1

 Awaiting an opinion from the Office of General Counsel concerning the need to classify shares as liabilities.

The portion of the Federal Credit Union Act amended by CEBA conflicts with Title II amended by CUMAA.

Matter pending.
Supervisory Committee Guide

HOW DO WE AUDIT “SHARES”?

Chapter 16

16-2

What do we look

for in reviewing

policies and procedures?

16.02 You must determine whether internal control policies and

procedures are adequate. For example, sound policies and procedures include directions for the following activities:

a) Management must reconcile subsidiary ledgers for both

share accounts and accrued dividends to their related general ledger control accounts at least monthly.

b) Supervisory or management-level person(s) review and approve transactions on special activities, such as unposted

items, overdrafts, returned items, employee account activity,

and dormant account activity.

c) Duties are segregated to the extent possible. For example,

staff opening new accounts or handling member’s

share/loan transactions shouldn’t also have access to accounting records. Similarly, accounting staff shouldn’t have

teller duties, or have access to unissued certificates.

d) Wire transfer activity is clearly defined and under dual control to the extent possible.

e) Documents are adequately protected and controlled, such

as signature cards, ledger cards, canceled checks, and deposit tickets. Such items should typically be kept in fireproof cabinets, with access restricted to appropriate personnel. Also, sensitive supplies like unissued certificates of

deposit, which are typically prenumbered, should be kept

under dual control.

f) Members’ statements are regularly mailed to depositors,

with proper control and follow-up on returned statements.

What audit procedures must we

perform to test

these internal

controls?

16.03 Attached at the end of this chapter is a sample Internal

Control Checklist: Shares (chklst16.doc) which can aid your understanding of the credit union’s system of internal controls. The

tests on the sample checklist include reviews of such key practices as:
Supervisory Committee Guide

HOW DO WE AUDIT “SHARES”?

Chapter 16

16-3

• Members’ signature cards.

• Mailing address files.

• Penalties for early withdrawal.

• Accounting reconciliations.

• Segregation of duties.

• Control over employee accounts.

• Control over dormant accounts.

• Disclosures of accounts.

How do we audit

the record keeping?

16.04 The general ledger control account for Members Shares

(Account No. 901) should equal the sum of all the individual

members’ accounts itemized on the credit union’s “Trial Balance

of Members’ Shares.” Attached at the end of this chapter is a

sample workpaper (chptr16.xls) for this audit step. You should

report any out-of-balance condition to the board of directors, and

ensure staff begins taking corrective action.

Some of the other key review areas include:

• Accrued dividends payable.

• Accuracy of dividend rates paid on members’ accounts.

Accrued dividends payable. This area is subject to errors and/or

fraudulent transactions that can inflate or deflate the credit union’s

net income condition. The account balance represents dividends

owed by the credit union but not yet credited to the members’ accounts. The amount in the account should bear a relation to what

part of the dividend period is being audited. For example, if dividends are paid quarterly, an audit period ending 2 months into a

quarter (such as February 28) would have a balance equal to

about 2/3 the amount of dividend expense in the prior quarter,

with some up or down adjustment according to whether shares

are increasing or declining.

Accuracy of dividends being paid to members. As a rule-of-
Supervisory Committee Guide

HOW DO WE AUDIT “SHARES”?

Chapter 16

16-4

thumb, the amount of dividend expenses should bear a direct relationship to the declared dividend rate. For example, if the board

of directors declares a 3.0 percent dividend rate, you should divide the amount of dividend expense by the amount of average

shares for the quarter, annualize the result, and have an effective

rate of between 2.25 and 3.25 percent.

Could you discuss with us the

sample workpapers appended to

this chapter?

16.05 The two attached workpapers are examples that you can

use to develop your own working papers. They are not allinclusive, and should be modified according to the level of internal

controls in your credit union.

See the instructions provided for each.
Appendix 16-A -- Internal Control Checklist: Shares

(chklst16.doc)

What does this

checklist

accomplish?

Completing this workpaper should help you review operating and

internal controls over share account activity of the credit union.

The Checklist is designed to be your primary guide for the share

audit.

How do we

complete the

Checklist?

You will need to prepare a number of working papers in the

process of answering some questions on the Checklist. We

provide one sample workpaper in this chapter, which is the same

one used in Chapter 10 -- LOANS; you can use either one for

compiling and testing subsidiary records with their General Ledger

control accounts.

After completing the checklist, you should have enough

understanding of the credit union’s internal control condition to

determine if the shares are properly recorded and reported.
Appendix 16-A -- Internal Controls Checklist: Shares

The following checklist will assist you in reviewing operating and internal controls.

You may find additional guidance in the AICPA’s “Audits of Credit Unions” and/or

“Credit Union Audit Manual.”

Test Procedure Yes No

1. Are share policies and

procedures effective?

Review the written policies to determine if

internal controls are well defined and

adequate. [16.03]

2. Is the general ledger in

balance with the

individual shares?

Reconcile the GL balance with the Trial

Balance of Individual Shares and Loans.

(Note: Any different ADP system totals,

such as a certificate program, should be

added to the Trial Balance totals.) [16.05]

3. Are dividend payments

correct?

Test-check a sample of members’

statements. Recalculate the dividend paid

to make sure the ADP is computing the

correct amounts. [16.07]

4. Are accrued dividends

correct?

Review the balance in the accrual account

for reasonableness, reconcile the detailed

transactions to the general ledger control

balance. [16.06]

5. Are signature cards

controlled?

Observe or obtain evidence that cards are

soundly originated and controlled. Test a

sample of new members for proper

qualification and approval for membership.

Determine if access to cards is limited.

6. Are mailing lists

properly controlled?

Observe or obtain evidence that mailing

lists are accurate and access is limited.

7. Are mail receipts

properly controlled?

Observe or obtain evidence that mail

receipts are opened under dual control.

8. Are withdrawal

penalties properly

posted?

Test for compliance with policies for earlywithdrawal-penalty interest recognition if the

credit union offers time deposit certificates.

Test a sample of early withdrawals to verify

that penalties are properly assessed and

posted to the credit union records.
Appendix 16-A

File: chklst16.doc

Appendix 16-A -- Internal Controls Checklist: Shares

Test Procedure Yes No

16-A-2

9. Are accounts properly

reconciled?

Review reconcilements to verify they are

prepared regularly, cleared in a timely

manner, and are reviewed by an

appropriate management individual.

10. Is there adequate

segregation of duties?

Observe or obtain evidence there is proper

segregation of duties. Persons handling

member transactions should not have

access to accounting records.

11. Are employee

accounts properly

controlled?

Determine that an appropriate individual

regularly reviews activity in employee and

officials’ accounts.

12. Is dormant account

activity properly

controlled?

Determine that an appropriate individual

regularly reviews activity in the inactive

accounts.

13. Did you review loan

reports such as:

• Paid-ahead loan

reports;

• Large concentration

loan reports;

• Loans with no activity;

• Zero interest loan

reports;

• Unpaid interest in

excess of loan

payment reports?

14. Did your review cover

loan extension and

refinance procedures?
Appendix 16-A

File: chklst16.doc

Appendix 16-A -- Internal Controls Checklist: Shares

Test Procedure Yes No

16-A-3

15. Did you review the

non-financial

transactions and/or file

maintenance reports:

Was there adequate

documentation in the

file to support any of

the following conditions

noted?

• Change in due date to

a later time;

• Interest rate changes;

• Payment amount

changes;

• Address changes?

16. Is their evidence of any

unusual activity or

preferential treatment

in an official or

employees share or

share draft accounts?

Review insider statements or account cards

for the audit period. Excessive deposits

and withdrawals could indicate check kiting

or other improper activity. Negative

balances in these accounts would be

considered interest free loans which

constitutes preferential treatment.

17. Are there any accounts

on the trial balance or

tape with negative

balances?

Review the trial balance or tape as of the

audit effective date for negative balance

share accounts. Determine the status of

each account and calculate the total

amount. Report the findings to the board.
Appendix 16-B -- Trial Balance of Members Shares Workpaper

(chptr16.xls)

What is the

purpose of this

workpaper?

By completing this workpaper, you will determine whether the

general ledger control accounts accurately reflect the total of each

member’s share balances.

How do we get

started?

Obtain a copy of the credit union’s Trial Balance of Members’

Shares and Loans report as of your audit date. The name of this

report may be slightly different, depending on your ADP vendor,

but is basically an itemized list of all members’ account in the

credit union. If your credit union has more than one ADP system

for accounts, such as a separate processor for certificate

accounts, you’ll also need a list of those accounts.

How do we

complete the

workpaper?

This is a two-part workpaper, with typically no need to go past

SECTION A unless the shares are out-of-balance for the current

month. You should complete SECTION B only to find out if an

out-of-balance condition is on-going or just occurred.

SECTION A: Insert the totals of all share types from the general

ledger in the first set of input boxes. In the following set of boxes,

put the totals from the detailed report of shares and loans. The

workpaper computes and displays the amount of any differences.

SECTION B: Insert the share data for the previous 2 months in

the boxes provided. Differences are displayed, and you can now

observe any changes in the out-of-balance amounts. If the

differences don’t change, you’ve found old errors. If the

differences change, recordkeeping errors are still occurring.
Supervisory Committee Guide

Appendices

Chapter 16

16-B-2

An out-of-balance condition represents a breakdown of accurate

and acceptable recordkeeping. In most cases, you can assume

the total of the detailed listing of members’ accounts is the true

figure, because the members’ accounts are verified biannually as

correct and members generally report errors when their periodic

statements are wrong. If the errors responsible for the out-ofbalance condition can’t be identified and corrected, the general

ledger balance is adjusted to match the individual account totals.

The adjustment creates either a loss or a gain.

Be aware that even a few dollars’ difference can be significant.

Sometimes very large errors might be involved which are

offsetting each other between the share and loan control

accounts.

What if the

differences are

due to old

errors?

Staff should research and correct the errors. After a reasonable

time for corrections, such as 60 days, the differences should be

written off, with board authorization, and the general ledger

brought into balance with the individual account totals.

What if the

differences

fluctuate?

Discuss with management what is being done to correct the

problem. Report management’s corrective actions to the board of

directors.

The cause of the recordkeeping errors must be identified and

corrected. Make, or cause to be made, test checks on a sample

of members’ accounts in order to identify what types of postings

are causing the problem. Suggested minimum test checks are:

a) Select a block of at least 25 member accounts at random

that have had transactions during the first 10 days of the

month you are auditing. Obtain printouts for the

transactions on each of these 25 accounts.

b) Obtain and have available all posting sources for the 10-day
Supervisory Committee Guide

Appendices

Chapter 16

16-B-3

period, such as Cash Received Vouchers, payroll

deduction listings, Journal Vouchers, etc. Obtain the

detailed list of daily transactions for each of the 10 days.

c) Compare each transaction on a member’s account with the

source documents. Each transaction should be accounted

for and matched to a proper source. Summarize and report

what incorrect postings you identified.

What do we

report?

You must report the out-of-balance situation to the board of

directors. Your report can include the following recommendations:

a) Staff should be given a reasonable time limit to research

errors and make corrections, such as 60 days, after which

the board of directors should authorize and direct staff to

adjust the general ledger account balances to bring them in

line with the individual account totals.

b) Adjusting entries shouldn’t be made until the board of

directors is assured that recordkeeping problems are

resolved and the problem won’t recur. After correcting the

causes of the problem, adjusting entries should be deferred

until the accounts are kept in balance for at least 3 months

in a row.

What if our credit

union doesn’t

use data

processing?

Manual recordkeeping of members’ share and loan accounts

require additional committee controls and computations:

• You should get control of the ledger cards on a surprise

basis, if at all possible, at the start of the audit.

• Prepare an adding machine tape of the shares in order to

complete this workpaper.
TRIAL BALANCE OF INDIVIDUAL SHARES

Credit Union: Ex Why Zee FCU Audit Date: 12/31/96

A. CURRENT BALANCES

TOTALSHARES

Sum of individual accounts from the Trial Balance(s): 395,000,000.00

General Ledger balance for total shares: 400,000,000.00

 Potential adjustment/(write-off): [analyze below] (5,000,000.00)

B. ANALYSIS OF DIFFERENCES - Previous 3 Months

00/00/00 00/00/00 12/31/96

From the Trial Balance(s): 0.00 0.00 395,000,000.00

From the General Ledger: 0.00 0.00 400,000,000.00

 Gain(Loss): 0.00 0.00 (5,000,000.00)

Describe actions by staff to correct differences shown in Sections A and B:

File: chptr16.xls
Paragraphs of this chapter will change upon the Board’s passage of implementing Prompt Corrective

Action regulations. Such regulations will replace existing reserve requirements.

NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 17 -- HOW DO WE AUDIT EQUITY?

17.01 What is equity?

17.02 What are the different types of equity accounts?

17.03 What are our audit objectives?

17.04 What are our audit procedures?

17.05 How do we test the internal control structure?

17.06 How do we determine that transactions are properly authorized?

17.07 How do we determine that entries are properly classified?

17.08 How do we determine that entries are recorded in the appropriate

amounts and at the right time?

17.09 What are the regulation requirements for the Regular Reserve

Account?

17.10 How do we determine if Regular Reserve Transfer amounts comply

with the regulation?

17.11 How do we verify transfers if management’s worksheet is not the same

as the one in the appendix?

17.12 How do we verify transfers if staff has not developed their own

worksheet?

17.13 What if management did not transfer the correct amount?

17.14 How do we verify other entries to the Regular Reserve account?

17.15 What if capital is negative (a debit balance)?

17.16 Are there other references that we can use for additional clarification

of equity account requirements?

Appendices

17-A Internal Control Checklist: Equity.

17-B Regular Reserve Transfers Worksheet.

What is equity? 17.01 Equity is net income that has accumulated since the

inception of the credit union. Equity is sometimes referred to as

capital, or reserves. It is necessary to have equity to protect the

credit union from any future operating losses.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-2

What are the

different types of

equity accounts?

17.02 Equity includes all general ledger accounts from #930

through #950. The separate categories are:

a) “Regular Reserves”. This is a “restricted” capital account,

meaning that management does not have ready access to

these funds. Regulations require the credit union to

transfer funds to this account, until it reaches an adequate

level. See Part B on page 17-B-2.

b) “Special Reserve for Losses” is a restricted capital

account that the credit union will have only if required by

the NCUA.

c) “Reserve for Loss Contingencies”. This is an

unrestricted capital account, simply used by the board to

earmark reserves for specific unrealized losses.

d) “Corporate Central Reserve”. This is an account used

only for corporate central credit unions and will not be

discussed further in this Guide.

e) “Undivided Earnings”. This is the account that all credit

unions use to store most unrestricted equity (unrestricted

accumulated income). Entries to close net income flow

through this account. You may also note transfers to other

equity accounts.

f) “Appropriated Earnings”. This is a restricted equity

account that the board may use to earmark funds for

planned expenditures or liabilities. You should not see

expenses taken directly from this account. Rather, they

flow through operating expenses, net income, and the

Undivided Earnings account, before final deduction from

this account.

g) “Accumulated Unrealized Gains/Losses on Available

for Sale Securities”. If the credit union has classified

securities as available-for-sale, this account will hold the

aggregate unrealized gain or loss on these securities.

Auditing requirements are not covered in this chapter.

Chapter 9 -- “How Do We Audit “Investments”?” addresses

this equity account. Only references in this chapter to
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-3

aggregate equity apply to this account. Add this account

to aggregate equity if there is a gain, or subtract from

aggregate equity if there is a market loss.

h) “Donated Equity”. For credit unions following a RAP-basis

of accounting, this account represents gifts or donations, of

material, tangible assets from outside parties. The account

should equal the market value of the asset. (If the asset’s

value is immaterial, the offsetting entry would be to “Other

Non-operating Income”.)

What are our

audit objectives?

17.03 Your objectives are:

a) Determine if internal controls are adequate.

b) Verify proper authorization and classification of

transactions.

c) Verify that all transactions are recorded in the proper

amounts and accounting period.

d) Verify that transfers to the Regular Reserve account

comply with regulations.

What are our

audit

procedures?

17.04 Your audit procedures are:

a) Test the internal control structure relating to equity. You

can place less emphasis on internal controls with equity

accounts because of required substantive testing under all

circumstances.

b) Obtain a listing of equity account transactions for the audit

period. Ensure that the history includes closing entries for

the period.

c) Verify that beginning balances tie to the closing balances
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-4

from the prior audit’s workpapers. Tie the ending balances

to the appropriate general ledger accounts. Tie the

general ledger balances to the financial statements.

d) Review transactions in all equity accounts. Are all

transactions properly:

• Authorized? (other than net income closings, and

required regular reserve transfers).

• Classified? (Should entries run through this account?).

• Recorded? (Including appropriate amounts, and on the

correct date).

e) Determine the transfer required to the Regular Reserve

account, and verify that staff transferred the appropriate

amount.

How do we test

the internal

control

structure?

17.05 Complete the internal control checklist at the end of the

chapter.

How do we

determine that

transactions are

properly

authorized?

17.06 The board should formally approve all transactions,

EXCEPT for net income closings and required Regular Reserve

transfers. Management should be able to provide you with a copy

of the board minutes that reflect appropriate approval. Verify that

the board approved the transaction prior to the transaction date.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-5

How do we

determine that

entries are

properly

classified?

17.07 The only entries that should flow through the equity

accounts are:

• Entries to transfer funds between equity accounts.

• Entries to close net income accounts (only to Undivided

Earnings).

• Entries that reflect prior period adjustments. This type of

entry should be rare. Occasionally, management will detect

an error that occurred during a prior period. If the error

affected net income, or the equity account, staff can make

the correction directly to the equity account. Adjustments

relating to a net income account that has closed should be

made to Undivided Earnings.

How do we

determine that

entries are

recorded in the

appropriate

amounts and at

the right time?

17.08 You should trace all entries in the equity accounts to their

source.

• Trace entries between equity accounts to both accounts,

verifying that the amounts and dates are the same. Also

ensure that the transfer is in the amount approved by the

board, if it requires board approval.

• Trace closing entries to the corresponding financial

statements, verifying amounts and dates.

• Question management on accounting problems that caused

any write-offs or prior period adjustments to ensure that the

reasons are adequate. Trace the entire entry to verify your

understanding of the adjustment as described by

management. Ensure that the entry is in the amount

approved by the board.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-6

What are the

regulation

requirements for

the Regular

Reserve

Account?

17.09 These regulations are in transition. The Credit Union

Membership Access Act (CUMAA) requires the NCUA to put in

place implementing regulations to effect Prompt Corrective Action

by certain key dates. The law requires credit unions to make set

asides from Undivided Earnings, until the account grows to a

specified level. The transfer equals a percentage of income.

Specifics of the regulation are pending.

How do we

determine if

Regular Reserve

Transfer amounts

comply with the

regulation?

17.10 Management may have developed a worksheet for their

own use in calculating risk assets and the appropriate transfer

amount. If so, you need to do the following:

a) Review their worksheets that cover the audit period. Verify

that management included all applicable accounts on their

worksheet and that calculations are accurate. You can use

the worksheet in the appendix to this chapter as a guide.

b) Verify the accuracy of figures that they used for the

worksheet for at least one period. To do this, trace the

figures listed on the worksheet to the applicable financial

statement or trial balance. Be sure to use pre-closing

Regular Reserves for your calculation (from the pre-closing

financial statement).

c) Trace the transfer amounts to the Regular Reserve

account to verify that transfers were for the appropriate

amount.

d) Verify transfers from Regular Reserves to Undivided

Earnings in an amount equal to the Provision for Loan

Loss amount for the period.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-7

How do we verify

transfers if

management’s

worksheet is not

the same as the

one in the

appendix?

17.11 The appendix worksheet calculation specifically complies

with the regulatory risk asset definition. Management may use a

simplified method of computing risk assets. This is acceptable as

long as the results of calculation are the same. The simplified

calculation is:

TOTAL LOANS

Less: Share secured loans

Government guaranteed loans, with < 5 yrs maturity

Loans to other credit unions with < 5 yrs maturity

Loans guaranteed by NCUA

Plus: Investments, that are not marked to market, with > 5 yrs

maturity

Accrued interest on the above investments

Accrued interest on loans

Other accrued income on risk assets

Receivable accounts

Equals: RISK ASSETS

Management would include in their worksheet only those accounts

applicable to your credit union.

How do we verify

transfers if staff

has not

developed their

own worksheet?

17.12 If management does not use a worksheet themselves, you

need to complete your own to verify all transfer amounts. The

calculation should be completed for all closings in the audit period.

The appendix to this chapter includes a sample Regular Reserve

transfer calculation worksheet. You can use this worksheet or

develop your own. You could also request that management

completes the worksheet and verify using the steps listed above.

Once you determine the transfer amount, you will verify actual

transfers by reviewing the Regular Reserve account history. The

final step is verifying that Provision for Loan Loss amount (for the

period) was deducted from Regular Reserves, and transferred to

Undivided Earnings.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY?

Chapter 17

17-8

What if

management did

not transfer the

correct amount?

17.13 If transfers made to the Regular Reserve account are not

sufficient, require management to make an additional transfer.

The additional transfer should equal the total required transfer

amounts, less the transfers made.

If management chooses to transfer additional amounts, or does

not want to reverse the period’s Provision for Loan Loss expense,

they must obtain board approval. You should verify that the board

approved the voluntary transfers.

How do we verify

other entries to

the Regular

Reserve

account?

17.14 The only debit entries should be the reversal of the

Provision for Loan Losses, or correcting entries. Other entries

transferring funds out of the Regular Reserve account are allowed

with NCUA approval. Contact your examiner or SSA if you note

any unauthorized deductions.

As noted above, if management chooses to transfer additional

amounts to the Regular Reserves, they must obtain board

approval.

What if capital is

negative (a debit

balance)?

17.15 If aggregate capital is negative, the credit union is

insolvent. You need to contact your examiner or SSA..

Also, note that management is able to pay dividends ONLY from

the unrestricted equity accounts.

Are there other

references that

we can use for

additional

clarification of

equity account

requirements?

17.16 Accounting literature describes equity accounts and the

NCUA Rules and Regulations set forth Regular Reserve

requirements. You could also contact your league, or use the

AICPA’s industry Guide for the Audit of Credit Unions for

additional information.
Appendix 17-A -- Internal Controls Checklist: Equity

The following checklist applies to credit unions with a moderate level of control

risk with respect to equity. If you identify significant internal control or

operational weaknesses, you should consider expanding your audit procedures

and testing accordingly. You may find additional guidance in the AICPA’s “Audits

of Credit Unions” and/or “Credit Union Audit Manual.”

Internal Controls:

Test Procedure Yes No

1. Has the board

approved all necessary

transfers?

Review board minutes for approval.

Voluntary Regular Reserve transfers, prior

period adjustments, and any other

miscellaneous entries should have board

approval.

2. Does management

review and reconcile

accounts?

Ensure that management reviews entries

for propriety and accuracy on a regular

basis.

Accounting Procedures:

1. Do general ledger

balances tie to the

financial statements?

Verify amounts.

2. Do the equity histories’

ending balances tie to

the general ledger

account?

Trace the ending balances listed on the

equity history account to the general ledger

account for ALL equity accounts.

3. Do beginning balances

tie to workpapers from

the prior audit?

Verify that the beginning history balances

equal your ending account figure from the

prior audit.

4. Did the board properly

approve required

transactions?

Trace the history of all equity accounts, and

verify that management obtained board

approval on applicable entries.
Appendix 17-A -- Internal Controls Checklist: Equity

Test Procedure Yes No

17-A-2

5. Are all entries

appropriately

classified?

Trace the history of all equity accounts.

Verify that management did not include

entries that should have been recorded in

another account.

6. Do net income figures

tie to the financial

statements?

Trace net income entries to the financial

statements for the applicable period.

7. Is there adequate

support for prior period

adjustments?

Ensure that management is able to

adequately explain and support any prior

period adjustments.

8. Are entries between

equity accounts for the

same amounts, and

dates?

Verify any inter-equity account transfers.

9. Are transfers to the

Regular Reserve

account accurate?

Compute the amount of transfer required.

Verify the amount actually transferred for all

closing periods.

10. Were Provision for

Loan Loss expenses

accurately transferred?

Ensure that PLL expenses are transferred

from Regular Reserves to Undivided

Earnings for each closing period.

11. Are deductions from

the Regular Reserve

account appropriate?

The only debit entries should be as noted in

#10 or an adequately supported correcting

entry. Contact the examiner if you find

otherwise.

12. Is aggregate capital a

negative balance?

If total capital is a debit figure, you should

contact your examiner.
Appendix 17-B --Regular Reserve Transfer Calculation

Worksheet Instructions

Note that the letters below (A, B, C, etc.) refer to figures listed on the attached

worksheet.

We have included a sample completed worksheet that you can use as a reference

when completing the blank form.

COMPLETE THE FOLLOWING NINE STEPS:

PART A - CALCULATING THE RISK ASSET RATIO

1. Complete all input areas on Part A -- “Calculating the Risk Asset Ratio”, page 1.

2. Determine the reserve level required by regulation for your credit union.

a) IF your credit union has less than $500,000 in total assets, OR has been in

operation for less than 4 years:

Transfer 10% of gross income, until C equals 7.5%.

Transfer 5% of gross income, until C equals 10%.

Transfers are not required when C is over 10%.

b) IF your credit union has over $500,000 in total assets, AND has been in

operation over four years:

Transfer 10% of gross income, until C equals 4%.

Transfer 5% of gross income, until C equals 6%.

Transfers are not required when C is over 6%.

3. If the ratio (C) is:

• Over 10% for credit unions qualifying under 2(a) above, OR

• Over 6% for credit unions qualifying under 2(b) above, then

Management should not have made a transfer to the Regular Reserve account.

You should verify this by reviewing the Regular Reserve account history. Enter the

actual amount of the transfer (if there is any) in H.

SKIP TO PART C - “VERIFYING THE OTHER TRANSFERS” OF THESE

INSTRUCTIONS.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY

Appendix 17-B

17-B-2

PART B - CALCULATING THE TRANSFER AMOUNT

1. If the ratio (C) is less than 7.5% (for 2(a) credit unions), or 4% (for 2(b) credit

unions), you need to compute the required transfer at 10% times gross income, for

all applicable periods. Complete the gross income section under Part B -

“Calculating the Transfer Amount”, section (D). At the same time, complete the

Provision for Loan Loss amounts (under Part C - “Calculating the Other Transfers”),

sections J and K, for the period. Multiply D by 10%, and list under “10%

TRANSFER AMOUNT” (F).

In our example, for the 9/30/95 period, the risk asset ratio (C) was 3.44%. The

transfer is computed by multiplying gross income by 10%, or $303,947 X 10%. The

transfer amount is $30,394. (F) reflects this amount.

2. If the ratio (C) is between 7.5% and 10% (for 2(a) credit unions), or between 4%

and 6% (for 2(b) credit unions), then the required transfer is 5% of gross income.

Complete the gross income section under Part B - “Calculating the Transfer

Amount”, section (D). At the same time, complete the Provision for Loan Loss

amounts (under Part C - “Calculating the Other Transfers”), sections J and K, for

the period. Multiply gross income by 5%, and list under “5% TRANSFER AMOUNT”

(E).

3. If the ratio (C) is close to a different transfer rate, you should determine if a “STEP

TRANSFER” is required (for example, a 3.9% ratio in a 2(b) credit union). In a step

transfer, part of the transfer is made at the higher rate, and the remaining gross

income is transferred at the lower rate.

Complete the gross income section under Part B - “Calculating the Transfer

Amount”, section (D). At the same time, complete the Provision for Loan Loss

amounts (under Part C - “Calculating the Other Transfers”), sections J and K, for

the period. Follow the steps outlined in our example below.

Example. Reference the sample worksheet form. The 9/30/95 period ratio (C) is

3.44%, a low enough ratio to avoid a step transfer. However, for the 12/31/95

period, the ratio was 3.89% (close to the 4% ratio, which would trigger a lower

transfer rate). To compute the actual amount required:

• Determine the level of statutory reserves needed to reach the 4% risk asset

level. In our example this would be risk assets (B) times 4%, or $347,256

• Subtract current statutory reserves (A) of $337,658, to arrive at the 10%

transfer required, of $9,598.

• Next, determine the amount of gross income remaining for the 5% transfer.

Take gross income, and subtract the amount of gross income you used for

the 10% transfer. $315,817 less $95,980, or $219,837.
Supervisory Committee Guide

HOW DO WE AUDIT EQUITY

Appendix 17-B

17-B-3

• Compute the 5% transfer amount by multiplying the remaining gross income

by 5%. $219,837 times 5%, or $10,992.

OR:

Your Figures

 347,256 B times 4%

 - 337,658 A

 9,598 10% transfer amount (list under F)

 315,817 D

- 95,980 10% transfer amount times 10

 219,837 Gross income remaining for 5% trfr

 X 5% 5% transfer rate

10,992 5% transfer amount (list under E)

4. Now that you have computed the required transfer amount (G), trace this amount to

the Regular Reserve account.

Fill in the actual amount of the transfer on (H), and compute any difference (I)

between your figure and management’s. If your computation amount and

management’s actual transfer amount do not agree, discuss the difference with

management. If you determine that management’s figure is incorrect, refer to the

chapter discussion for considerations.

PART C - VERIFYING THE OTHER CLOSING ENTRIES

1. If you haven’t already done so, complete the Provision for Loan Loss section. Use

the financial statement for the applicable period. These sections are labeled (J)

and (K) on the worksheet.

2. Trace these amounts to the Regular Reserve account. You should notice entries

deducting these amounts from Regular Reserves (and flowing into Undivided

Earnings). Reference the chapter discussion if the amounts do not agree, or these

entries are not made.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 18 -- HOW DO WE AUDIT INCOME?

18.01 What is our audit objective?

18.02 What accounting issues will we need to address?

18.03 What audit procedure do we use to determine if income is properly

recorded ?

18.04 What do we look for in reviewing policies and procedures?

18.05 Could you discuss with us the Gross Test Workpaper appended to this 

chapter?

Appendix

18-A Gross Test of Interest on Loans Workpaper

What is our audit

objective?

18.01 Your objective is to determine if income is properly

recorded and reported.

Your primary goal in this chapter is to test the activity relating to

loans, the credit union’s primary income producing asset. You will

test the income from investments, which represent almost all of

the other significant income to the credit union, as part of your

Chapter 9 auditing procedures.

What accounting

issues will we

need to address?

18.02 Income accounts are maintained according to their

function, such as loans, investments, and fees and charges.

Income is accumulated in these accounts until they are closed into

Undivided Earnings at the end of each accounting period.

Loan income is usually accrued when earned even if not yet

received. As a rule of thumb, the account(s) for accrued income

from current loans should have a balance of no more than

approximately one-half the earnings for a single month, plus

whatever is earned but not yet collected on delinquent loans.
Supervisory Committee Guide

HOW DO WE AUDIT INCOME”

Chapter 18

18-2

Additionally, accrual of income from the delinquent loans is limited

by NCUA policy to no more than 3 months of earnings.

What audit

procedure do we

use to determine

if income is

recorded

properly?

18.03 Perform an analytical test of the income earned in relation

to the income actually recorded. Attached as Appendix 18-A is a

sample Gross Test of Interest on Loans workpaper. Significant

differences you may identify between the income earned and the

amount actually collected and/or recorded may indicate fraud and

should be reported immediately to the board of directors. A

difference greater than +/- 5 percent is typically cause for further

and more detailed auditing, such as reviewing income accounts

for the possibility of debit entries being used to offset credits to an

insider’s share account.

Another tool you can use to review accrued interest is a computer

generated Accrued Loan Interest Report, which lists accrued

interest by each loan. Any loan with a high accrued interest

amount should be a delinquent loan or one with a high principle

balance. If not, the high figure could be an indication of fraud. If

you find unexplained high accruals, check for payment due dates

that are advanced to hide delinquency and divert the credit

union’s income to an insider’s account.

You should also be aware of the need for sound, written internal

control policies and procedures in relation to the receipt and

recording of income.

What do we look

for in reviewing

policies and

procedures?

18.04 You must determine whether internal control policies and

procedures are adequate. For example, sound policies and

procedures should include directions that:

a) Subsidiary reports or ledgers for both income received and

accrued are reconciled monthly by management to their

related general ledger control accounts.
Supervisory Committee Guide

HOW DO WE AUDIT INCOME”

Chapter 18

18-3

b) Duties are segregated to the extent possible. For example,

staff handling member’s loan payment transactions

shouldn’t also have access to accounting records. Similarly,

accounting staff shouldn’t have teller duties.

Could you

discuss with us

the Gross Test

Workpaper

appended to this

chapter?

18.05 The attached workpaper is an example that you can use

to develop your own working papers. It is not inclusive, and may

be modified and tailored to your credit union.

See the instructions provided for the workpaper.
Supervisory Committee Guide

HOW DO WE AUDIT INCOME”

Chapter 18

18-4

Appendix 18-A -- Gross Test of Interest on Loans Workpaper

(chptr18a.xls)

What is the

purpose of this

workpaper?

By completing this workpaper, you will verify that the general

ledger control account(s) for loan income accurately reflects the

total income actually earned by the credit union. The Gross Test

is only an estimate, and can’t verify exactly the amount collected.

It will, however, disclose material overcharges or under collection

of interest charged the members, and could disclose fraud.

How do we get

started?

Obtain the following:

• The credit union’s Statement of Income and Expenses for

each month of your audit period, for not less than the

previous 12 months.

• The data processing report that breaks out the loan portfolio

by the various interest rates being charged. This report

varies between data processors, and may be arranged by

loan balances or by collateral types. Many credit unions get

this report regularly for management reviews, but you might

need to order the report from the processor.

How do we

complete the

workpaper?

We recommend using the software version of this form, which is

available to download in Microsoft Excel via Internet through

NCUA’s home page at www.ncua.gov. Otherwise, you can copy

the blank form and calculate by hand those areas for totals and

percentages.

The workpaper is designed to detail the amount of loans

outstanding at various interest rates in the loan portfolio for each
Supervisory Committee Guide

HOW DO WE AUDIT INCOME”

Chapter 18

18-5

of the last 12 months. You will fill in the shaded areas to the

extent of the information available to you.

Most computer systems can provide a detailed report upon

request that can be used as a source for this workpaper. Enter

the annual percentage rate (APR) detail available from your

system in the far left column, and then the loan amounts at each

rate for each of the last 12 months. With a fair amount of

precision, the spreadsheet formulas will calculate the amount of

Earned Interest income for each month.

You must enter the amount of Recorded Interest On Loans for

each month in the area provided below the line for Earned

Interest. Recorded interest can be obtained from the general

ledger Interest on Loans account. The spreadsheet formulas will

then display the percentage difference between the amount of

interest earned and the amount actually recorded as collected and

accrued. The spreadsheet will also display the word “YES” at the

bottom of any month where the difference varies by more than 5%

in either direction.

What if the

differences are

greater than 5

percent?

Keep in mind that one or more months may display the “YES”

warning. When the variance is close to the 5% tolerance, the

number of days in a month different from 1/12 of a year can result

in display of the warning. More than a few such flags can be

cause for concern. The most significant variance is that for the

entire 12-month period. If this variance is more than 5 percent in

either direction, you should consider expanding your audit of this

area.

The cause of the variance must be identified. Make, or cause to

be made, test checks on a sample of members’ loans in order to

identify what is causing the variance. Suggested minimum test

checks are:

1. Select a block of at least 10 member loans at random that

have had transactions during the first 10 days of the month

you are auditing. Obtain printouts for the transactions on

each of these 10 accounts.
Supervisory Committee Guide

HOW DO WE AUDIT INCOME”

Chapter 18

18-6

2. Obtain and have available all posting sources for the 10-day

period, such as Cash Received Vouchers, payroll deduction

listings, Journal Vouchers, etc. Obtain the detailed list of

daily transactions for each of the 10 days.

3. Compare each transaction on a member’s loan with the

source documents. Each transactions should be accounted

for and matched to a proper source. Summarize and report

what incorrect postings you identified.

What if our credit

union doesn’t

use data

processing?

Manual recordkeeping of members’ share and loan accounts

require additional committee controls and computations:

• You should get control of the ledger cards on a surprise

basis if at all possible at the start of the audit.

• Prepare an adding machine tape of the loans in order to

complete this workpaper.

• Most credit unions have more than one interest rate for

loans. It’s necessary to determine the portion of loans that

are made at each rate. This can be done during the review

of loans by using a symbol to identify, on your tape of the

loans, the different annual percentage rates (APRs) of the

loans reviewed. Afterwards, these identified loans can be

totaled for each APR, and a ratio calculated for the amount

each APR represents in the entire loan portfolio. These

ratios can then be used to calculate the amount of loans

outstanding at each APR, and the results entered into the

attached Gross Test workpaper.

Example:

Assess the ratios identified in the loan review are as

follows:

25% of the loans are at 15% APR
Supervisory Committee Guide

HOW DO WE AUDIT INCOME”

Chapter 18

18-7

75% of the loans are at 10% APR

then

0.25 x Loans = Gross Test @ 15.0% APR

0.75 x Loans = Gross Test @ 10.0% APR

• Using these calculations, enter APRs into the column on the

left side of the spreadsheet and the corresponding loan

balances for just your audit date into the right side column.

Don’t enter any loan balances in the individual month

columns.

• Enter the amount of Recorded Interest for the prior 12-

month period, using the financial statements, in the block

provided in the far right column.

The spreadsheet will calculate and display the amount of Earned

Interest in the right side column, and show you if the variance

exceeds 5%.
APPENDIX 18A -- GROSS TEST: INTEREST ON LOANS

Credit Union: Ex Why Zee FCU Audit 

Prepared By:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct No

APRs:

12.00% 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 5

Total Loans: 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 5Recorded Interest: 5,000 5,500 6,000 4,500 5,050 5,050 5,050 5,050 5,050 5,050 Earned Interest: 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 

Difference: 0.0% 10.0% 20.0% -10.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 

> 5%? YES YES YES
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §§715.

Chapter 19 -- HOW DO WE AUDIT EXPENSES?

19.01 What general ledger accounts are included in the operating expense

area?

19.02 What is the general audit strategy for operating expenses?

19.03 How do you increase testing of operating expenses?

19.04 How do you review internal controls over operating expenses?

19.05 What are the general audit objectives for operating expenses?

19.06 What are the general audit procedures for operating expenses?

19.07 How do you complete an analytical review of operating expenses?

19.08 What are the audit objectives for Employee Compensation and

Benefits Expense?

19.09 What are the audit procedures for Employee Compensation and

Benefits Expense?

19.10 What are the audit objectives for Dividend Expenses?

19.11 What are the audit procedures for Dividend Expenses?

19.12 What are the audit procedures for Employee Travel and Conference

Expense?

19.13 What are the audit procedures for Cash Over and Short?

19.14 What are the audit procedures for the corporate credit card account?

19.15 What are the audit procedures for other operating expense

categories?

Appendices

19-A Internal Control Checklist: Expenses.

19-B Operating Expenses Worksheet.

What general

ledger accounts

are included in

the operating

expense area?

19.01 The 200 - 300 series of accounts in the general ledger

identify the expense accounts credit unions use.

Operating expenses include the following accounts:
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-2

Acct # Category

210 Compensation Expense.

220 Employee Benefits Expense.

230 Travel and Conference Expense.

240 Association Dues.

250 Office Occupancy Expense.

260 Office Operations Expense.

270 Educational and Promotional Expense.

280 Loan Servicing Expense.

290 Professional and Outside Services.

300 Provision for Loan Loss.

310 Member Insurance.

320 Federal Operating Fee Expense.

330 Cash Over and Short.

340 Interest on Borrowed Money Expense.

350 Annual Meeting Expenses.

360 Truth in Lending Expenses.

370 Miscellaneous Operating Expenses.

380 Dividend Expense.

385 Interest on Deposits.

What is the

general strategy

for auditing

operating

expenses?

19.02 Due to the number of operating expense accounts and the

volume of transactions, a good audit strategy is to complete a

thorough review of the material expense accounts (those with a

higher dollar balance) and to exercise sound judgment for the

selection of other expenses for review. You may use analytical

review (See 19.07 for further details) to determine the selection of

the other expense accounts to review.

In general, the expense accounts with the highest dollar balances

which require a detailed testing are:

• Dividend Expense.

• Compensation Expense.

• Employee Benefits Expense.

In general, the other expense accounts which should be reviewed
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-3

to determine if there is abuse are:

• Travel and Conference Expense.

• Cash Over and Short.

• Miscellaneous Expense.

In addition, if your credit union has a corporate credit card account

for management or officials, the credit card activity should be

reviewed to determine if there is abuse.

How do you

increase testing

of operating

expenses?

19.03 You increase testing of operating expenses by increasing

the sample size of your review scope.

You increase testing of operating expenses when:

• Internal controls are weak.

• There is a material dollar or percentage increase in an

operating expense account(s).

• There is a large budget variance (difference between actual

versus budget amount).

• A reasonable explanation is not provided by management for

an inquiry.

How do you

review the

internal controls

over expenses?

19.04 You may use the internal control check list in this chapter.
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-4

What are the

general audit

objectives for

operating

expenses?

19.05 You:

• Determine that internal controls relating to expenses are

adequate.

• Determine that accounting practices recognize expenses on

a reasonable and consistent basis.

• Determine that expenses are authorized and are approved

credit union business expenses.

• Determine that expenses are properly classified on the

income statement.

What are the

general audit

procedures for

operating

expenses?

19.06 You:

• Review internal controls relating to operating expenses.

• Complete an analytical review of each operating expense

account.

• Test expenses by selecting a sample of expenses recorded

in the general ledger in the audit period and trace to source

documentation such as the bill of sale or subsidiary ledgers

for prepaids and furniture and fixtures.

• Review the board meeting minutes to determine that

operating expenses are approved monthly.

• Trace the general ledger expense account balances to the

credit union’s income statement.

Refer to the appendix to this chapter for a sample work paper to

document the expense review. Instructions are included.
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-5

How do you

complete an

analytical review

of operating

expenses?

19.07 Analytical expense review involves the comparison of

expense account balances for at least two audit periods. For

example, if the audit date is December 31, you compare the

expense account balance as of December 31, 2002, with the prior

year balance as of December 31, 2001. A significant dollar or

percentage difference triggers a need for further review.

Further review of the expense account involves inquiries with

management and verifying a selected sample of expenses.

Supervisory committee members familiar with ratio analysis may

use ratio comparisons for the analytical review procedure.

Another analytical review procedure for operating expense is the

comparison of actual expenses with budgeted expenses. A

budget variance report should be completed by management and

submitted to the board of directors for review. You may use the

budget variance report to trigger the review of significant budget

variances.

What are the

audit objectives

for Employee

Compensation

and Benefits

Expense?

19.08 You:

• Determine that internal controls are adequate for reliance.

• Determine if adequate records exist for payroll, taxes, payroll

expenses and employee benefits.

• Determine if payroll and benefits programs are properly

approved.

• Determine if compensation and benefit expenses are

properly classified on the income statement.

• Determine if salaries and bonus amounts being paid are

what have been approved by the board.
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-6

What are the

audit procedures

for Employee

Compensation

and Benefits

Expense?

19.09 You:

• Review the internal controls relating to payroll and benefits

expense.

• Perform an analytical review of payroll and benefits expense.

• Trace payroll expenses recorded in the general ledger in the

audit period to source payroll documentation.

• Trace employee salary in the payroll records to

management/board approval.

• Review payroll tax returns to determine if they are filed

properly.

• Review payment of tax liabilities for compliance with state

and federal tax laws.

• Review new benefit programs (insurance, pensions, etc.) for

board approval.

• Trace a sample of benefit expenses recorded in the general

ledger in the audit period to invoices or source documents.

What are the

audit objectives

for Dividend

Expense?

19.10 You:

• Determine if internal controls are adequate.

• Determine if dividends are properly approved.

• Determine if dividend expense is fairly represented.

• Determine if dividend expenses are properly classified on the

income statement.
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-7

What are the

audit procedures

for Dividend

Expense?

19.11 You:

• Determine if Dividends Payable and Accrued Interest

Payable are fairly represented as of the audit date.

• Test a sample of individual accrued dividend and interest

calculations.

• Test a sample of individual dividend paid transactions on a

member statement or account history.

• Test dividend and interest expense recorded in the general

ledger to dividend paid reports for a selected period (for

example, the audit year).

• Review the board minutes for board approval of dividend

rates in the audit period.

• Compare the yields on share products with dividend rates in

effect for the audit period.

What are the

audit procedures

for Employee

Travel and

Conference

Expense?

19.12 You:

• Review the board approved policy for travel and conference

expenses.

• Review a sample of travel and conference expenses

recorded in the audit period to determine if the expense is:

⇒ Properly documented.

⇒ Within the board approved policy.

⇒ Within the budget and affordable by the credit union.

⇒ Relevant to credit union business.

⇒ Authorized by management or the board of directors.
Supervisory Committee Guide

HOW DO WE AUDIT EXPENSES?

Chapter 19

19-8

What are the

audit procedures

for Cash Over

and Short

Expense?

19.13 You:

• Review the board approved cash over and short policy.

• Review the teller cash over and short log (maintained to

record over and short situations).

• Review cash over and short expense in total and by

individual tellers.

• Review any significant cash over or short problems in the

audit period, and determine if management is effective in

minimizing cash over and short expense.

What are the

audit procedures

for the corporate

credit card?

19.14 You:

• Review the corporate credit card statements issued in the

audit period.

• Review the receipts maintained with the statements.

• Review the appropriateness of the charges on the credit card

account(s).

• Verify that an individual other than the cardholder is

reviewing and paying the credit card bill.

What are the

audit procedures

for other

operating

expenses?

19.15 Refer to paragraph 19.06 in this chapter for the general

guidelines to use for reviewing other operating expense

categories.
Appendix 19-A -- Internal Controls Checklist: Expenses

The following checklist will help you review operating and internal controls relative to

expenses. You may find additional guidance in the AICPA’s “Audits of Credit

Unions”.

Test Procedure Yes No

1. Do the board minutes

contain an up to date

record of the names of

officials and employees

who are authorized to

sign credit union

checks?

Review the board meeting minutes for

board approval on all current check signers.

Board’s goal should be appropriate

segregation of duties and setting limits on

the number of staff authorized to sign

checks.

2. Are banks or other

financial institutions

immediately notified to

remove terminated

employees from the

authorized check

signer list?

Inquire with management. The credit union

should have a practice in place to

immediately notify the bank if an employee

with check signing authority is terminated,

resigns, retires, etc. This limits the

opportunity for an unauthorized transaction

to occur on the account.

3. Are invoices or

supporting expense

documentation

provided to the

authorized check

signer prior to signing/

completing the check?

Inquire with management. Supporting

documentation must be supplied to the

authorized check signer before issuing the

check.

4. Are checks

prenumbered and

accounted for?

Review check storage procedures with

management. Checks should be numbered

and used sequentially. The beginning and

ending check numbers should be monitored

and recorded daily.
Appendix 19-A -- Internal Controls Checklist: Expenses

Test Procedure Yes No

19-A-2

5. Are voided checks

properly maintained?

Review voided check procedures with

management. Voided checks should be

marked as such to prevent an unauthorized

use of the check.

6. Are bank

reconcilements

prepared monthly by

persons not directly

involved in paying

expenses?

Review who completes the bank

reconcilement and who the authorized

check signers are. These duties should be

separate if the staff size of the credit union

is adequate for a segregation of duties.

7. Does the board of

directors approve

operating expenses

each month after the

review of the income

statement?

Review the board minutes to note monthly

approval. Determine if the board reviews

operating expenses that are materially

above budget or that show an unexplained

large increase.

8. Are employee salaries

approved at least

annually by the board

of directors?

Review the board minutes to verify that the

board approves employee salaries

annually. The minutes should contain a list

that includes the employee name, position,

and approved annual salary or hourly pay

rate. Are written procedures in place and

followed?

9. Do all employees

receive a written

annual review or

performance appraisal

before salary increases

are approved?

Recommended for sound personnel

management. A performance appraisal

should be completed prior to salary

adjustments. Are written procedures in

place and followed?

10. Are records maintained

for employee earnings,

vacation and sick pay?

Records must be maintained in a personnel

file or similar record keeping system to

document current salary, unused vacation,

sick, personal days, etc. Are written

procedures in place and followed?
Appendix 19-A -- Internal Controls Checklist: Expenses

Test Procedure Yes No

19-A-3

11. Are tax returns

completed on time and

is this verified by

someone other than

the primary employee

who completes the

return?

Verify that payroll tax returns are completed

on time and that payroll tax liabilities are

paid on time. Another employee should

verify that these items are completed, to

avoid the possibility that fines and penalties

could be levied for incomplete returns or

late payment of tax liabilities.

12. Are employees and

officials with corporate

credit cards prohibited

by written policy not to

use the card for

personal reasons?

Corporate credit card controls must be

reviewed due to the potential for abuse or

inappropriate activity. All employee and

official corporate credit card accounts

should be monitored monthly.

13. Is senior management

required to approve

employees to attend

out of town seminars?

Recommended to limit the potential for

expense abuse. Notation should be

documented in the board meeting minutes

for any conferences attended for a

significant dollar amount.

14. Is board of director

approval required for

senior management to

attend out of town

seminars?

Recommended to limit the potential for

expense abuse. Notation should be

documented in the board meeting minutes

for any conferences attended for a

significant dollar amount.

15. Is a periodic

independent review

completed for

conference expenses

and corporate credit

card statements?

A supervisory committee or board of

director member should review this activity

monthly. If this activity is reviewed monthly

by an independent individual, the audit

scope may be adjusted accordingly.
Appendix 19-A -- Internal Controls Checklist: Expenses

Test Procedure Yes No

19-A-4

16. Are dividend and

interest rates approved

by the board of

directors and included

in the minutes?

Review for approval in the board minutes.

Approval must be documented for each

dividend period.

17. Are dividend paid

reports retained for

review, either in hard

copy form or on

microfiche?

Inquire with management. These records

should be retained for use during the audit.

18. Are vendor invoices

marked paid and filed

to prevent duplicate

payment?

Review a sample of paid invoices to

determine that individual invoices are

appropriately documented and filed for

future reference.

19. Are all invoices

approved by an

authorized individual

(management) prior to

payment?

Review a sample of paid invoices to

determine that an authorized individual is

documenting approval for the expense.

20. Are overall internal

controls over cash in

bank accounts

adequate?

Refer to the internal control check list for

cash in bank, Chapter 8. Weak internal

controls over cash in bank affect the check

payment of expenses.
Appendix 19-B -- Operating Expenses Workpaper Instructions

How do you

complete the

workpaper

provided for

operating

expenses?

You:

a) List the general account number for all credit union

operating expense accounts in column 1.

b) List the general ledger account description or account title in

column 2 for all operating expense accounts.

c) List the general ledger account balance, as of the audit

date, in column 3.

d) Complete the analytical review procedure for all operating

expense accounts. After completing, place a “Y” for yes in

column 4.

e) Include the analytical review workpaper used to document

the work was performed. The workpaper should document

the comparison of the current audit period with the prior

audit period. Refer to Chapter 19, analytical review section.

f) Complete the applicable audit procedures stated in the

Supervisory Committee Guide for Credit Unions for the

account under review.

g) Enter a “Y” for yes in column 5, “completed audit

procedures”. Include the supporting work papers used for

the audit of the expense account.

h) Place an “N/A” for not applicable in column 5, if specific

auditing procedures were not completed for a particular

expense. A short explanation should be provided to

document why a particular expense account was not

reviewed, such as:

• Immaterial account balance.

• Balance consistent with prior year.

i) Place a “Y” for yes in column 6 “reportable condition”.

Reportable conditions are findings which should be included

in the final audit report, based on the judgment of the

supervisory committee member completing this part of the

audit.
APPENDIX 19B -- OPERATING EXPENSES WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. 

No. Description of Asset G.L. Balance

Completed 

Analytical 

Review

Completed 

Audit 

Procedures

Exception 

(Yes or No)

0 5,000.00 $ Y Y N

File: chptr19a.xls
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 20 -- HOW DO WE AUDIT “RELATED PARTY

TRANSACTIONS”?

20.01 What are “related party transactions”?

20.02 How do you identify the “related party” accounts for the audit?

20.03 What are the audit objectives for “related party transactions”?

20.04 What are the audit procedures for “related party transactions”?

20.05 How do you audit loans to employees and officials?

20.06 How do you audit share accounts for employees and officials?

20.07 What are some examples of “reportable conditions”?

Appendices

20-A Internal control checklist: Related Party Transactions.

20-B Sample workpaper -- Schedule of employee and official loan and share

accounts audited.

What are “related

party transactions”?

20.01 “Related party transactions” are business transactions

between the credit union and the employees, board of directors,

committee members and/or their relatives. Common types of

related party transactions are loans and share accounts. Other

types of related party transactions may be the use of vendors or

suppliers that are related to credit union employees or officials.

How do you

identify related

party accounts

for the audit?

20.02 You start the review of “related party transactions” by

obtaining a listing of employee/official names, addresses, social

security and account numbers. The manager should have a list

with this information. The EDP system terminal may be used (for

credit unions with an EDP system) to locate account numbers for

related parties.
Supervisory Committee Guide

HOW DO WE AUDIT “RELATED PARTY TRANSACTIONS”?

Chapter 20

20-2

The procedures that may be used are:

• Complete a last name search.

• Complete an address search.

• Complete a social security number search.

You must review “off-line” loan trial balances to be certain that all

loan types are reviewed. Off-line loans are loans that do not

appear on the credit union’s main EDP system. Examples of offline loan products are: credit card loans, real estate loans,

student loans, vehicle leases, etc.

Other ways to become aware of related party transactions include:

• Review of board meeting minutes.

• Review a sample of expenses or paid bills during the audit

period.

What are the

audit objectives

for “related party

transactions”?

20.03 You determine if:

• Internal controls are adequate.

• Favoritism, conflicts of interest or insider abuse are

prohibited.

What are the

audit procedures

for “related party

transactions”?

20.04 You should:

• Review internal controls over related party transactions.

Refer to the internal control checklist at the end of this

chapter.

• Inquire with management about related party transactions.

Ask the manager if he/she is aware of any material related

party transactions.

• Review the board meeting minutes for information on related
Supervisory Committee Guide

HOW DO WE AUDIT “RELATED PARTY TRANSACTIONS”?

Chapter 20

20-3

party transactions. Read the board meeting minutes to

determine if any information on related party transactions is

disclosed.

• Complete or obtain a schedule of employee, official and

relatives loan/share balances. Refer to the Appendix at the

end of this chapter for a sample schedule. In some credit

unions, this type of report is already available if the EDP

system has the capability to “code” or identify accounts

belonging to employees and officials. If the accounts are

“coded” a report of share and loan balances may be easily

completed. Verify that the coding system is properly used.

• Review loans to related parties. Refer to Chapter 8 in this

Guide for the detailed information on how to review a loan.

Review share account activity for related parties. Refer to

section 20.06 in this Chapter for information on how to

review share account activity.

• Determine if employees, management, directors or officials

receive preferential treatment for loan rates, loan terms,

service charges, dividend and interest rates on

shares/certificate accounts. Compare the loan rates with the

board approved loan interest rate schedule. Compare the

loan term with the board approved loan policy. Compare the

share dividend rate with the board approved dividend rate.

Compare the services and fees charged with the board

approved fee income schedule.

• Review a sample of expenses and paid bills to determine if

any related party transactions exist with vendors or suppliers.

Keep an awareness of possible related party transactions

when reviewing expenses.

How do you audit

loans to official

and employees?

20.05 Refer to Chapter 10, “How Do We Audit Loans?”, in this

Guide for the audit procedures.
Supervisory Committee Guide

HOW DO WE AUDIT “RELATED PARTY TRANSACTIONS”?

Chapter 20

20-4

How do you audit

share accounts

for employees

and officials?

20.06 You review the account history for a sample time period.

Usually one calendar quarter of account activity is a satisfactory

sample time period. You may review statements, account history

printouts, or the history on the computer terminal screen.

Pay particular attention to the following:

• Large dollar amount transactions.

• Frequent check deposits and check withdrawals (may be an

indication of check kiting).

• Negative balance in share or share draft accounts.

• Unidentified journal entries between the General Ledger and

a related party account.

• Failure to impose fees for certain transactions (such as NSF

drafts), as stated in the credit union policy.

Expand your time frame of review if there are any indications of

inappropriate activity.

What are some

examples of

“reportable

conditions” for

“related party

transactions”?

20.07 The following items serve as examples of “reportable

conditions” that should be included in the audit report to the board

of directors. These conditions may require written notification to

the surety bond company:

• Delinquent loans.

• Preferential loan interest rate, term or collateral.

• Material violation of loan policy.

• Negative share or draft account.

• Preferential share dividend or interest rate.

• Failure to impose a fee in relation to credit union policy (NSF

fee, ATM fee, etc.).

• Unauthorized changes to insider’s share and loan accounts,

detected through a review of file maintenance reports.
Appendix 20-A -- Internal Controls Checklist: Related

Party Transactions

The following checklist will assist you in reviewing operation and internal controls

over related party transactions. You may find additional guidance in the AICPA’s

“Audits of Credit Unions” and/or “Credit Union Audit Manual.”

Test Procedure Yes No

1. Are loans to

employees approved

by independent

individuals, such as the

credit committee?

Verify that good Internal controls are in

place to ensure the credit committee

approves loans to employees. It is

preferable for loans to employees to be

approved by individuals independent of coworkers.

2. Are aggregate loans

over $20,000 to

officials approved by

the board of directors?

Review the board minutes to determine that

board approval is documented for

aggregate loans over $20,000 to all

officials. This approval is required by the

law for Federal credit unions.

3. Is a current list of

account numbers for

employees and officials

maintained?

Verify that the manager maintains a current

account list for all employees, officials and

related individuals. If a current list is not

maintained, this is an indication that

accounts are not properly monitored.

4. Does the manager

periodically review

share and loan account

activity for the

employees’ accounts?

Verify. If the accounts are not periodically

reviewed, the supervisory committee must

complete a thorough review of this area at

the time of the audit.

5. Does the supervisory

committee periodically

review share and loan

activity for the

manager’s accounts?

Verify. If the accounts are not periodically

reviewed, the supervisory committee must

complete a thorough review of this area at

the time of the audit.

6. Are negative account

reports and NSF draft

reports properly

monitored?

Determine if management reviews these

reports for possible employee or official

account abuse. These reports should be

filed and readily available for review.
Appendix 20-A -- Internal Controls Checklist: Related

Party Transactions

Test Procedure Yes No

20-A-2

7. Are computer file

maintenance reports

independently

reviewed for data

changes?

Recommended for sound internal controls.

Does an employee who does not have the

ability to complete data changes to the

share and loan accounts review the report

of data changes for each business day?

Does he/she also review for any unusual

data changes through inquiry and

investigation?
Chapter 20 --RELATED PARTY TRANSACTIONS

Workpaper instructions for Completing Appendix 20-B

How do you

complete the

work paper

provided for

related party

transactions?

You should determine if an alternative work paper is available to

document this review, e.g., can your credit union produce a share

and loan trial balance run for only employee and official

accounts?. If such a report is available at your credit union, check

its accuracy by comparing a sample of accounts to the standard

share and loan trial balance report. If the account balances match

and the report is accurate, the trial balance for employee and

official accounts can be used to document your related party

transaction review.

If this report is not available at your credit union, than the sample

workpaper provided will provide satisfactory evidence that the

accounts were audited.

You complete the following data:

1. List the employee’s or official’s name in column 1.

2. List the employee’s or official’s position in column 2.

3. List the employee’ or official’s account number in column 3.

4. List the share account balance in column 4.

In the Loan data fields, you:

• List the original loan amount.

• List the current loan balance as of the audit date.

• List the original loan date.

• List the loan interest rate.

• List the collateral, if any.

• List the loan term in number of months.

• List the current delinquency status (number of months

delinquent, if any, as of the audit date).

In the review field, you:

• List a “Y” for yes after reviewing the loan file, in the Loan

Reviewed column.

• List a “Y” for yes after reviewing the share account activity, in

the Share reviewed column.
Workpaper Instructions for Appendix 20-B

Page 2

2

If a loan exception is noted in the loan review, list a “Y” for yes

and ensure that the exception is included in the loan exceptions

document for your audit report (refer to Chapter 10, “How do we

audit loans?”).

If no loan exception is noted, list a “N” for no in the Exception

column.
APPENDIX 20B -- SCHEDULE OF EMPLOYEE AND OFFICIAL SHARE AND LOAN 

Credit Union: 

Completed by:

 Loan Data 

Name Position Account No. Share Balance Original Amount Current Balance Date of Loan Rate Collateral Term 

Jane Doe Manager 123456-78 2,500 $ 5,000 $ 4,500 $ 1/1/96 15.00% unsecured 36 
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 21 -- HOW DO YOU REVIEW AN EDP SYSTEM?

21.01 Why is it important to review the EDP system?

21.02 What should be our objectives in evaluating the EDP system?

21.03 What is a system survey and what do we need to know about the

process of conducting a system survey?

21.04 What are management controls and how do you assess them?

21.05 Could you discuss organizational management controls?

21.06 What management controls should we look for relevant to planning for

growth?

21.07 What management controls should we look for governing contracted

services?

21.08 What management controls should we look for governing disaster

recovery?

21.09 Could you give us an overview of general controls?

21.10 What general controls should we look for governing system security?

21.11 What do you need to know about general controls related to backup

procedures?

21.12 What do you need to know about general controls related to computer

operations?

21.13 What do you need to know about application controls?

21.14 What do you need to know about application controls related to

programming standards?

21.15 What do you need to know about application controls related to

program changes?

21.16 What do you need to know about data processing application

controls?

Appendix

21-A EDP System Survey Worksheet
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-2

Why is it

important to

review the EDP

system?

21.01 Most credit unions have computerized their systems.

Due to the role of the computer in credit union operations it is

imperative this area be reviewed during the audit process.

Therefore consideration should be given to selecting at least one

individual with computer knowledge as part of the supervisory

committee.

What should be

our objectives in

evaluating the

EDP system?

21.02 Your objectives are to:

a) Gain a general understanding of how the credit union

manages the EDP operation.

b) Identify the various parts of the computer operations and

the staff responsible for those parts in the organization

chart.

c) Ensure proper information is being provided to management

to guide decisions in planning for the credit union’s growth.

d) Determine the extent to which the credit union relies on

contracted services.

e) Ensure policies governing contracts are being followed for

the EDP area.

f) Ensure Disaster Recovery plans are established and

properly validated.

g) Ensure proper back-up procedures have been implemented

and are being followed.

h) Determine if the board has developed policies addressing

the security of credit union records and confidential member

data.

You will need to test:

a) Media security of electronic data.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-3

b) Physical security of equipment that processes the data.

c) System reconstruction ability in case of a disaster.

The purpose of these objectives is to protect the investments of

members, to protect the security of members data, and to ensure

the ongoing operation of the credit union. You should always be

aware of these objectives when doing the EDP audit.

In conjunction with these objectives the following procedures are

provided to give you the ability to:

a) Perform a computer system audit of a small credit union

(CU).

b) Contract for an EDP audit of the computer system in large

operations.

c) Review the EDP audit report for reasonableness.

Your report on the outside audit report should identify:

• The control areas reviewed or contracted for review.

• The extent of the review of the control areas.

• Results of review.

• Recommendations, as appropriate.

As with any type of audit, workpapers should reflect the steps

performed while doing various tests.

In this chapter, we identify the steps required to perform an audit

of a small credit union computer system. Within this section, we

will identify the criteria used to determine when the hiring of an

outside EDP auditor would be appropriate. Also included will be

the steps that you can complete when contracting for an outside

EDP audit. Finally, the steps provided can be used as a reference

when reviewing an EDP audit report for reasonableness. The

starting point is a system survey.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-4

What is a system

survey and what

do we need to

know about the

process of

conducting a

system survey?

21.03 Appendix Tool. Appendix 21-A includes an example of a

system survey form. You can complete the System Survey step

yourselves or verify the completion of it by another. The survey

should help you identify all the systems currently computerized in

the credit union and indicate the importance of that system to the

credit union. The survey procedure will help you determine areas

to be audited. Performing an extensive audit of programming

controls may not be applicable when a credit union purchases

software.

Use of Outside Auditor. If you are not familiar with a particular

system’s computer and operating system, consider hiring an

outside auditor. The type of hardware and related operating

system should also be an indication of the need to hire an outside

auditor to perform the review. When contracting for an outside

EDP audit, provide the survey information to the outside auditor.

Objective of Survey. A system survey will help you determine

the current level of computerization that exists at the credit union.

The survey should identify all computerized systems and the

required hardware on which the system runs. In addition, it should

rate the systems as to relative importance to the overall operation

of the credit union. That is,

• Can the credit union operate if a particular system is down a

half day, one day, one week, or a month?

• Can the credit union recreate the system if the data is a

total loss?

• If not, is the data necessary for the continued operation of

the credit union?

• Are any of the services supplied by a third-party?

The objective of the survey is to identify:

• Software currently being used by the credit union.

• Hardware that the software requires.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-5

• Relative importance of the software to credit union

operations.

• Ability to recreate should electronic data be destroyed.

The survey is the basis of all EDP reviews. Controls that affect

those items rated high in importance would have first priority.

Considering the results of the survey, you can determine where to

place the EDP audit effort. The following is a list of some of the

possible computerized systems:

Shares and Loans

Investments

General Ledger

Payroll

Check Register

Accounts Payable

Fixed Assets

ATM machines

Credit Cards / Debit Cards

Real Estate Loans

Internet Page

The next step in reviewing the EDP system is to assess

management controls.

What are

management

controls and how

do you assess

them?

21.04 You need a general understanding of how the credit union

manages the EDP operation. The review of management controls

will address the following areas:

a) Organization.

b) Planning for Growth.

c) Contracted Services.

d) Disaster Recovery.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-6

The credit union should have a well-defined organizational

structure that identifies the EDP role in the credit union. As the

credit union grows, so will the EDP function. Senior

management’s plans for credit union growth should include

requirements for upgrading the EDP system as necessary.

Identify key contracting concerns as related to the computer

operations and develop procedures to ensure that management

addresses the concerns. The contracting for service should

follow the credit union contracting requirements plus have

additional requirements related to EDP concerns. Finally, there

should be a disaster recovery plan that will include the recovery of

the computer system should a major disaster occur.

Could you

discuss

organizational

management

controls?

21.05 The objective of this review is to identify the various parts

of the computer operation and identify staff responsible for those

parts in an organization chart.

The computer system must meet certain requirements to fulfill the

ongoing processes of receiving data input, processing the data,

and generating reports. The difference between a small credit

union and a large credit union is the complexity of the required

software and hardware necessary to perform and support these

functions. Therefore the required organizational structure of the

EDP function would follow similar lines between large and small

credit unions. So even though a small credit union does not have

a separate DP function, it is necessary to document the EDP

organizational structure.

Identify the different operating points of a computer system.

Correlate operating points to personnel who are responsible for

the various parts of the computer operation. The operating points

to be identified are:

• Overall Operation of the Computer System.

• Computer Software/Hardware Upgrade.

• Data Input.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-7

• Data Output.

• Data Reconciliation.

• Programming.

• System Backup.

Someone is responsible for each of the items with respect to the

computer system. You should develop an organization chart

identifying who is performing each of these functions. Attached to

the organization chart, you should provide a job description of all

personnel identified. There should be a clear separation of duties

based on the organization chart.

In a small credit union where one or two people are performing the

above functions it might be appropriate for you to verify the

backup and data reconciliation process quarterly. You do this by:

• Being present during the process.

• Verifying the reasonableness of the process.

• Checking/testing the log of backups and data

reconciliations.

The organization chart should clearly demonstrate separation of

duties. In the small credit unions where this is not reasonable,

you should provide a footnote to the organization chart. The

footnote should identify the additional procedures you used to

offset this control issue. If you have hired an outside EDP auditor,

complete this process and provide it to the EDP auditor.

What management controls

should we look

for relevant to

planning for

growth?

21.06 The credit union’s computer system is not an unlimited

resource. Software usually has a limit as to the number of records

it can process. The computer system will slow down as data input

into the system increases, based on the processor speed and

complexity of programs used. Hard drives have limited space.

Serious consequences could occur should the hard drive run out

of
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-8

space on a busy afternoon.

Planning for computer growth along with credit union growth will

prevent these types of problems. Management should also

question the status of computer resources when planning credit

union growth. Your audit should ensure that proper computer

information is being provided so that the credit union Board can

make correct decisions in planning for the credit union’s growth.

You need to verify that the credit union has identified acceptable

criterion for key resources of the computer system. Some areas

needing consideration are:

• Hard drive capacity.

• Data access speed for reports.

• Wait time for data input/screen queries.

• Batch processing time.

The credit union can set guidelines based on the hardware and

software limitations. For example, if the hard drive usage reaches

80%, personnel should order a spare hard drive. Installation of

the additional drive should occur at the 90% mark. Bulleted items

2 through 4 listed above require time frame criteria so the

following are identifiable:

• Ideal response time.

• Acceptable response time.

• Unacceptable response frame.

You should ensure that someone is monitoring these criteria. A

rapidly growing credit union could require monthly checks of these

items. If the credit union is growing very slowly, verification once

a year would be adequate. Your EDP audit should verify the

reasonableness of the goals and that they are being monitored

relative to credit union growth. Finally, planned credit union

growth should incorporate expected changes in computer

operations and related requirements.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-9

Negative income can be the result of poor planning for computer

growth.

What

management

controls should

we look for

governing

contracted

services?

21.07 The computer center can have several different areas of

contracted services. This is especially true when the credit union

is relatively new to computerized systems or is a smaller credit

union. However, even large credit unions can require some areas

of contracted services. Some of the areas of contracted services

are hardware maintenance and programming services. These

areas are generally critical to the ongoing operation of the credit

union.

The credit union should follow its policy governing contracts. For

example, if a credit union contracts for a new office to be built,

contractor bonding is required, plans are required, cost limits are

defined, legal counsel is obtained, etc. -- Similar criterion applies

for contracting computer services. Computerized systems require

additional review as described below.

• Hardware Maintenance. Credit unions may contract for

hardware services when the credit union does not have

personnel who are knowledgeable about hardware or where

it is too expensive to maintain adequate inventory to

perform maintenance system. The additional areas to be

reviewed within the contract are:

⇒ Average time frame between call and response,

⇒ Emergency time frame between call and response, and

⇒ Guaranteed up and running time frame.

These time frames should be close to the time frames

identified in the EDP survey worksheet. If they are not, the

credit union could have some serious problems. A clause

reimbursing the credit union for any losses due to the

outside service providers exceeding the contracted

response time is desirable.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-10

• Programming Services. Credit unions may either

purchase or contract for ongoing programming services.

The cost of maintaining programming staff is prohibitive for

medium to small credit unions. The alternative is to:

⇒ Contract a programmer to write the program.

⇒ Purchase a software package off the shelf.

⇒ Contract with a provider of services.

The first concern is whether the software has a report writer.

The credit union could save money and time if it could

access the data and create one-time reports through the

use of a report writer.

The second concern is the ability of the software to

generate a common database or file that another software

package or provider of services could assimilate. It is time

consuming to key in credit union data. Also data input is

subject to normal human errors.

The third concern is that the provider of services assist in a

change over to another provider of services or an internal

program at a set cost per hour for a set period of time after

notification. The contract should specify the hourly rate and

specific time frame. Assistance after the conversion should

continue for a minimum of three of three months.

Assistance for six months to a year is preferable. The

contract should also require copies of all vendor system

audit reports be provided to the credit union.

What

management

controls should

we look for

governing

disaster

recovery?

21.08 Disaster recovery procedures for the computer system are

defined as the ability of the credit union computer system to be up

and running in a reasonable amount of time when a disaster

occurs that affects the system. A disaster, for example, is

something that destroys the computer room and everything in it.

An example of this is a fire that burns down the credit union office

along with the computer. The question that arises is whether the

credit union can be up and running in a reasonable amount of

time. The EDP
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-11

System Survey defines the timeframe. The credit union must

develop and document procedures that address this concern.

The EDP audit needs to verify that this procedure is in process or

completed.

The size and location of the credit union will define the extent of

any control necessary for an adequate disaster recovery system.

The following items are required for the credit union to open for

“business as usual” in a reasonable amount of time after a

disaster:

• List of current personnel to be notified.

• Offsite location.

• Required hardware must be available.

• Operating systems used by the credit union must be

available.

• Programs and data must be available.

• Instructions on how to put this information together.

Most likely, one day is insufficient to complete this process even if

all of the above is in place. It will take a concentrated effort by

management to ensure all of this data is in place and works.

Your EDP audit should verify that the list of personnel to be

notified is current, the offsite location exists, the required

hardware is available at the location, and the instructions are

appropriate. You should verify the availability of programs, data,

and operating system under the General Controls - Backup

Procedures section of this chapter.

It is very important that you verify that the disaster recovery

process works. You can do this by either verifying the process

through review of the documentation of the test or being at the

offsite location at time of test. There should be a test of the

system at least once a year. You should be aware that computer

personnel will be performing the tests at the offsite test location

until the system functions correctly and they document this
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-12

condition. As soon as possible after the backup system has been

established, a backup person (i.e. a board member) should

perform the tests.

After assuring yourselves concerning management controls, you

need to focus on general controls.

Could you give

us an overview of

general controls?

21.09 General Controls provide an umbrella effect on the total

computer operation. They do not relate to a specific application or

function but cover the entire system. Good general controls are

part of the overall internal accounting control environment. If

proper general controls are in place, they will contribute to the

safeguarding of credit union assets. General controls cover areas

such as:

• System Security.

• Backup Procedures.

• Computer Operations.

The backup process provides the credit union the ability to restore

systems that may experience a problem. This is a critical part of

the review for credit unions that have data that it cannot restore if

the computerized media (i.e. tapes, disks) are destroyed. System

security installs physical safeguards to protect the computer and

related resources. In addition to the cost of computer hardware

there is the cost of replacing the data within the computer.

Replacement cost could be very expensive. Computer operations

are the processes that run the computer, all software, and controls

the output of data. Needless to say if anything goes wrong here,

the computer process stops dead in its tracks. The review of this

area should ensure that the credit union can quickly restore lost

data and also prevent outside interference in the operation of the

computer system.

You should diagram the physical layout of the computer operation

to efficiently perform this review. You should clearly identify key

items. Include the following minimum items:

a) The computer.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-13

a) The tape backup system and library where applicable.

b) The control terminal.

c) Any user that may have access to the control terminal from

his or her desk.

You should footnote this workpaper as to your collective

conclusion on the reasonableness of these controls. Reference

appropriate workpapers.

You should be able to do this review. You may require help

during the review of computer operations depending on the

complexity of the computer system.

What general

controls should

we look for

governing system

security?

21.10 The Board of Directors of the credit union is responsible

to determine the importance of records identifying member’s

ownership in the credit union. The Board of Directors should

address the level of security that is acceptable to the credit union.

The Board policy should address these areas of security:

• Physical Security.

• Data Security.

• Personnel Security.

These are the areas where someone can cause accidental or

intentional harm to either the hardware or the software used by

the computer system.

Physical security. Credit unions that locate the data processing

system's main database in a separate area should control access

to the area by lock and key. Only authorized personnel should

have access to this area and adequate protection against fire,

theft or other damage to equipment should be in place. The same

is true for access to workstations & terminals where practical. The

computer system itself should have some tracking mechanism to

determine attempts at unauthorized use. Supervisory personnel

should monitor this mechanism. Violation reporting procedures
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-14

should be in place alerting management of any breech of security.

Data security. Only authorized personnel should access credit

union data. This should be on a ‘need to know’ basis. Each

employee should have their own private log-on and password

code to log onto the system, and only have access to the

necessary area in which they work. Employees should not share

access codes between themselves or with others. Supervisory

personnel can periodically review access logs to monitor access.

Personnel Security. Separation of duties is one of the most

important factors among general controls. Where practicable,

individuals’ access to applications should be separated by

functions such as data input, data processing, and output. Where

it is not practical to separate duties a frequent review of

transaction logs can compensate to some degree. Also the credit

union should make background checks of all personnel that have

access to sensitive data or responsibility for operation of the

computer system.

You should verify that the credit union:

• Changes locks periodically or when personnel are changed.

• Changes passwords periodically.

• Performs background checks on personnel.

What do you

need to know

about general

controls related

to backup

procedures?

21.11 Computer backup is the process of duplicating the current

data on the computer system. The credit union backup can

backup to disk, tape, or CD depending on the requirements of the

computer system. With costs of disks and CD duplication coming

down in price, more systems are using this type of media for

backups. Also disk drives and CD data lasts much longer than

data stored on tape.

Depending on the size of the credit union and software

requirements per the EDP System Survey, the backup process
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-15

may consist of various methods or combinations of media

backups. Senior management makes decisions about the time

requirements for restoring data. Some of the alternatives are:

• Immediate restoration of data/software.

• Restoration can be by start of business the next day.

• Any combination of these depending on the software.

When the credit union requires the capability of immediate

restoration of data, they should make two backups. One backup

would go offsite for disaster recovery and the second backup

would be maintained onsite should restoration of files or software

be needed during the day. In all cases, one copy should be

stored offsite. You need to verify that management did make a

decision concerning this area and that it is being followed.

You, at a minimum, should verify that the credit union has backed

up all software data files and software programs and that it keeps

each in a safe place. It is advisable that at least three generations

of backups be done of the data files. These backups are daily,

weekly and monthly. The credit union should backup program

files periodically as tapes and disks can lose their integrity over

time. The credit union should also back up program files

whenever it makes any changes or upgrades to the system. The

credit union should also backup the current version of the

operating system.

The credit union should record all backups in a backup log, clearly

identifying each backup with: the backup time, backup date and

sequence number, and operator information. Someone should

clearly label the backup tapes or disks to match the log and place

them in a location secure from fire or other threats. It is preferable

to store these tapes or disks off site at a location readily

accessible such as a vault or storage service. The credit union

should clearly document the procedure for restoring files so it is

easy to follow, and store it with the outside backups.

It cannot be over emphasized that periodic testing of the restore

procedure be done. This is to assure that the backup and restore

processes are in fact working properly. The credit union should

log
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-16

test results with the following:

• Date and time of the test.

• The files tested.

• The name of the operator who performed the test.

• And the results of the test whether successful or not.

Supervisory personnel of the credit union should periodically

review this log.

What do you

need to know

about general

controls related

to computer

operations?

21.12 The operating system is the main system software

program that allows communication between the different parts of

the computer including both hardware and software programs.

Operating system documentation needs to be available and up to

date. Some of the areas that you need to review are:

a) The current version number and name of the operating

system.

b) Whether the credit union has the current version of the

operating systems.

c) How the credit union notifies staff when it changes the

operating system..

Management should maintain written procedures for computer

operations and update them on a regular basis. These include

the scheduling of:

• System maintenance.

• Data output.

• Problem reporting.

• Problem correction.

The computer operator controls the processing of data by the
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-17

computer. The computer operator schedules and runs batch

programs. Areas of concern as they relate to the computer

operator are:

a) The operator should not originate entries for processing.

b) Correcting Entries should not be done at the control

terminal.

c) The operator should not do program balancing procedures

other than run-to-run controls.

The operating terminal is the focal point of the computer

operations and you need to make sure to address all issues.

Finally, there should be an alternate source of power such as an

uninterrupted power supply for the main computer system. You

should attend the testing of this process and verify:

a) The computer continues to operate after a power

termination.

b) Low power conditions result in notification to users.

c) The computer is brought down softly, and

d) Turning the computer on resulted in a proper restoration of

the computer.

After assuring yourselves concerning the general controls, you

need to focus on application controls.

What do you

need to know

about application

controls?

21.13 Application controls apply to the processing of data into,

through, and out of the computer. Also included in this section

are the procedures used to develop, test, and make changes to

programs. These procedures ensure:

a) The program is efficient.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-18

b) Program changes address the user’s specific requests.

c) The program adequately protects the processed data.

These goals are difficult to achieve when several programmers

follow their own instincts while developing a program.

Programming controls try to ensure that all programmers follow

one road to the location defined by the user. Programming

standards have a standard routine library so programmers use the

same code when needing a common routine. It is necessary to

define the program goal so the programmers head in the same

direction. If you do not know where you are going you do not

need a map to get there. The cost of program development,

software maintenance, and program changes is expensive. This

is the reason for Application controls.

In any Information Systems environment the integrity of the

application software is critical. Errors in data processing due to

lack of proper standards in programming or processing can be

very costly. It is therefore necessary that you verify that proper

standards are set up and adhered to with regard to the following

areas:

a) Programming Standards.

b) Program Changes.

c) Data Processing.

The type and complexity of applications should also be an

indication of whether you should hire an outside auditor to perform

the review. If you are not familiar with a particular system’s

application software you should consider hiring an outside auditor.

Please note that this is one of the more difficult areas to audit.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-19

What do you

need to know

about application

controls related

to programming

standards?

21.14 The purpose of programming standards is to provide the

users assurances that programs developed:

a) Are created as quickly as possible.

b) Have standard routines that are consistent in all programs

developed.

c) Use tools that allow the programs to run as efficiently as

possible.

Programs used for production are generally in machine language.

The programmer writes the program in a language such as

COBOL. The program is then compiled into machine language.

The computer is most efficient when processing machine

language programs. Also it is not possible to alter the program

either accidentally or intentionally without the source code and the

compiler. The programming languages used today for production

programs have compilers.

Your audit needs to verify that the programming staff have the

necessary tools to accomplish the tasks and that they use the

tools. Also programming standards include instruction on the

programming of common routines to ensure consistency between

programmers. Some common routines are date manipulation,

headings, date stamps, etc. The more advanced programming

standards can define how to write the programs. Please note that

when a programming shop changes a standard program used,

they must develop new written standards.

You need to survey the programming shop to determine the

developed standards and the programming tools available to the

programmers. Some of the items to check for are:

• Written standards.

• Program naming standards for development, testing, and

production.

• Library of standard routines.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-20

• Program documentation requirements.

• Program testing standards.

• Efficiency test standards or third-party testing programs.

• Program acceptance by user.

• Program documentation filing procedures.

Once you identify the standards, you will need to determine if

these standards are reasonable. The workpapers should state

clearly which standard(s) needs improvement and the basis of the

opinion.

You need to review the use of standards. This will require a

sample program(s) be taken and verification of the application of

the standards. Discuss with the user, items such as speed of

operation and reasonableness of data input, to ensure that the

program is running with little or no errors, and was put into

production within a reasonable amount of time.

Note: To perform this part of the audit the auditor will need

a high level of computer programming skills. The EDP

auditor should do this part of the audit.

What do you

need to know

about application

controls related

to program

changes?

21.15 Over time the environment we work in changes. This will

require changes to the programs we use to process data

information. Generally we develop one time programs that grow

in importance and require us to use them routinely. These

programs run against the data we use for production. Also

regulations may require a change in the data we need to produce

to perform our job. Any of these reasons and others may require

the manager of a department to request a change to their

production program.

At this point in time the department manager will go to the DP

department and request a change to the production program. The

DP department will then process this request through their

program change standards. You need to get a copy of the DP

shop’s
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-21

standards for changing a production program. Some items to

check for are:

• User requirements for defining requests.

• Procedures for assigning job, setting completion time, etc.

• Requirements for working with user.

• Testing requirement -- use of test deck.

• User acceptance.

• Install procedures used by the computer operator.

You need to verify that the requirements comply with program

change standards, and that the complete process is documented

and incorporated into the current program documentation. You

need to test that these standards are being addressed by the

programming shop. You need to review a sample of program

change requests.

You need to review the program change request log for completed

items. Select a sample of a program change for review. At a

minimum, you should verify that the following items are

addressed:

a) All changes to programs are documented as to date, type of

change, and modules and programs affected.

b) In addition the changes need to be user tested before being

put into production.

c) User and system documentation must incorporate an

explanation of the change needs, as appropriate.

d) The user signed off that the program adequately addressed

the program change requirement.

e) The computer operator installed the new program with the

change. The program name was correct and reflected the

completed program per program naming conventions.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-22

What do you

need to know

about data

processing

application

controls?

21.16 Data Processing Control Review is the audit of a

specific application that will include verification that the specific

program had standards applied as defined above. In addition, the

review will include an analysis of the department's procedures for

inputting data, verifying data input, and generating reports.

You will need to review the structure of the department using the

application being audited. A useful audit tool is a flowchart of the

data flow within the department. The flowchart must easily

identify control points. You need to verify that the controls are

being used at the points of data input, data processing and data

output. At a minimum, verify the following:

a) Input authorizations, data verification at entry, control totals,

where applicable, exist.

b) Program mechanisms to detect and reject entry errors input

into the system.

c) Authorized personnel should accomplish processing.

During processing there should be a reconciliation to input

control totals, verification of file access, verification of

program access, and of data entry.

d) Reconcile output to processing totals, visually check data

for verification and ensure data is only accessed by

authorized individuals.

In conjunction with the above items, if the application interacts

with any of the major credit union systems as outlined in the

System Survey, the need for good standards cannot be over

emphasized. At a minimum, you should ensure the following:

a) The application should have a complete and current set of

program documentation and user documentation.

b) The application should include mechanisms for complete

audit trails indicating information such as the identification

of the user, transaction numbers, and explanation of entry.

c) The application should also include mechanisms for error
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-23

handling and reporting so that personnel can correct

problems immediately or track problems to the program or

entry source and implement corrective action.

d) Security mechanisms prevent unauthorized users from

accessing the program.

Electronic Funds Transfer. The Federal Reserve Wire System

is gradually becoming another medium for money transfers in

credit unions. This includes incoming money transfers from the

Fed as well as outgoing transfers to the Fed. Credit unions

generally use money transfers to transfer funds for investments.

Some credit unions are now offering this service to their members

in the form of third-party transfers. Credit union members are

then able to move their money electronically worldwide.

The Federal Reserve Wire System generally has good controls

over the wire transfer system. However, these controls protect the

FRB’s liability should a loss occur. The credit unions are

responsible for the controls over their wire transfers.

You should review the procedures used by the credit union to do a

wire transfer. A flowchart of the process will identify key people

and controls. After you fully document the system for processing

wire transfers, review the following concerns:

Computer Access.

• Computer should be in a restricted area or in a locked

room.

• Log-on to the computer should be password restricted.

Audit Trail should be Documented.

• Identify the person requesting the transfer.

• Identify the employee initiating the transfer.

• Verify control of passwords for transfers.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-24

• Identify the person verifying the wire transfer.

• Verify wire transfer by call-back to members.

Daily Reconciliation.

• FRB and related accounts.

• Daily audit of wires compared to FRB reports.

• Bank reconciliation’s done in a timely manner.

• Correspondence confirmation slips compared to wire

requests.

• Persons other than personnel involved with the wire transfer

function perform the reconciliations.

You should also verify credit union personnel confirm adequate

funds in a member account before processing any transfer

requests.
Supervisory Committee Guide

HOW DO YOU REVIEW AN EDP SYSTEM?

Chapter 21

21-25

Appendix 21-A

Worksheet -- EDP System Survey

See footnote instructions below.

System Rating Recreated Hardware & Operating System

Shares and Loans | | |

 Contractor:

Investments | | |

Contractor:

General Ledgers | | |

Contractor:

Payroll | | |

Contractor:

Check Register | | |

Contractor:

Accounts Payable | | |

Contractor:

Inventory / Fixed Assets | | |

Contractor:

ATM machines | | |

Contractor:

Credit Cards / Debit Cards | | |

Contractor:

Real Estate Loans | | |

Contractor:

Internet Page | | |

Contractor:

**************************************************

Rating: 1 = 1/2 day, 2 = 1 day, 3 = 1 week, 4 = 1 month (How long credit union can afford for the

system to not work)

Recreated: If electronic data is destroyed can it be recreated - Yes or No

Hardware & Operating System: e.g. IBM 390 - MVS, IBM-PC Pentium - Windows 95, or LAN

Server (Dell 4050 / XE) - Window NT or Novell 3.12, etc.

Contractor: Software provider (e.g. Fedcom, programmed in house, etc. )
NOTE: This Guide is addressed to the non-professional volunteer in a credit union

operating in an elementary data processing environment. Compensated auditors should

look to the requirements of the Federal Credit Union Act and the National Credit Union

Administration Rules and Regulations §715.

Chapter 22 -- WHAT OTHER AUDIT CONSIDERATIONS DO WE

NEED TO ADDRESS?

22.01 Do we need to review for compliance with regulations?

22.02 Who controls regulations, and monitors for compliance?

22.03 How do we review for regulation compliance?

22.04 What are the primary regulations affecting credit unions we need to

know about?

22.05 Are there any repercussions from lack of compliance?

22.06 What resources are available to learn more about regulations?

22.07 What types of security devices should the credit union have?

22.08 Are we responsible for detecting fraud?

22.09 What signs of fraud should we look for?

22.10 What should I do if I suspect fraud?

Appendix

22-A Enforcement Responsibility For Laws Affecting Credit Unions.

Do we need to

review for

compliance with

regulations?

22.01 Yes, you need to review for compliance at least to a limited

extent. All officials of the credit union should be familiar with the

current regulations governing credit unions.

Who controls

regulations, and

monitors for

compliance?

22.02 When Congress passes an act, regulations are issued to

implement the act. The NCUA board is responsible for many of

the regulations affecting Federal Credit Unions, and related

enforcement. In some cases, other agencies are responsible for

regulations and compliance.
Supervisory Committee Guide

WHAT OTHER AUDIT CONSIDERATIONS DO WE NEED TO ADDRESS?

Chapter 22

22-2

How do we

review for

regulation

compliance?

22.03 You should review for regulation compliance while

completing the various phases of the audit.

You need to assess whether the credit union is using industrystandard forms. Standard forms may provide assurance that the

credit union complies with most regulations. If the credit union

developed their own forms, they should have obtained a legal

opinion of their own to support compliance. Of course, staff still

needs to complete the forms accurately. You should review how

the forms are completed, to ensure that they appear reasonable.

The credit union’s most recent examination or audit may address

regulation violations. If so, you should ensure that management

sufficiently addressed all issues.

What are the

primary

regulations

affecting credit

unions we need

to know about?

22.04 The primary regulations affecting credit unions are the

Federal Credit Union Act, and the NCUA Rules and Regulations.

Many other regulations affect credit unions; some of which we will

not address in this chapter.

The following is a list of most of the regulations affecting credit

unions. The enforcement authority is set forth in the appendix to

this chapter. The NCUA publication Compliance: A SelfAssessment Guide is available to assist you to self test your credit

union’s compliance.

• Truth-in-Savings --

• Truth-in-Lending --

• Fair Credit Reporting Act --

• Bank Secrecy Act --
Supervisory Committee Guide

WHAT OTHER AUDIT CONSIDERATIONS DO WE NEED TO ADDRESS?

Chapter 22

22-3

• Expedited Funds Availability Act --

• Electronic Funds Transfers Act --

• Equal Credit Opportunity Act and Fair Housing Act --

• Home Mortgage Disclosure Act, Flood Disaster Protection

Act, Real Estate Settlement Procedures Act --

• Internal Revenue Service --

Many state or local regulations may apply as well. The local credit

union league or government office can assist you. IRS directives

and regulations also apply dealing with the collection and

reporting of taxes. The local IRS office can assist you. Ensure

that tax liability accounts clear on a timely basis.

Are there any

repercussions

from lack of

compliance?

22.05 Yes. Lack of compliance, in some instances, can result in

substantial civil and/or criminal penalties. The officials must pay

strict attention to regulations particularly because of the potential

penalties.

What resources

are available to

learn more about

regulations?

22.06 The credit union should establish and maintain a current

reference library of the various regulations that apply to the

services it offers. You could also contact your local league, or a

lawyer (particularly if you note problems), for assistance.

What types of

security devices

should the credit

union have?

22.07 You should simply ensure that records and credit union

assets are adequately protected. The types of devices will vary

with the size and risk of the credit union. All credit unions should:

a) Lock essential records in a vault, or fire-proof filing cabinets.
Supervisory Committee Guide

WHAT OTHER AUDIT CONSIDERATIONS DO WE NEED TO ADDRESS?

Chapter 22

22-4

b) Limit access to the credit union, including monitoring who

holds keys. Management should change locks if a person

with their own keys leaves the credit union.

c) Provide locking teller drawers, and limited access to cashlike instruments. Ensure that tellers have bait money, or a

similar device.

d) Larger credit unions, or those with more risk, may have

motion detectors, entrance alarms, and teller alarm buttons.

Review to ensure that protection is reasonable.

e) Also reference the Chapter 21, “How Do You Review An

EDP System?” for additional information on EDP security.

Are we

responsible for

detecting fraud?

22.08 Your audit is not designed to detect fraud. However, you

should be aware of possible fraud while conducting the audit.

What signs of

fraud should we

look for?

22.09 Sometimes fraud may be obvious. However, most fraud is

detected by stumbling onto a circumstance that indicates possible

problems, and then researching them further.

Keep these “red flags” in mind while conducting the audit.

a) Reconcilements, transactions or documentation:

• Are unusual.

• Are altered.

• Are excessive.

• Contain “plugged” figures.

• Do not foot.

• Are unreasonable.
Supervisory Committee Guide

WHAT OTHER AUDIT CONSIDERATIONS DO WE NEED TO ADDRESS?

Chapter 22

22-5

b) Poor internal controls, including poor record keeping. Attain

this information through your review of internal controls in

your planning and other area reviews.

• This is particularly true with weaknesses in cash

controls, or other easily convertible instruments.

• This is also particularly true if weak controls exist in an

environment with disgruntled or needy employees.

c) Nervous, aggressive, or unusual behavior by employees.

d) No segregation of dormant accounts. A large number of

“Do not mail” accounts, with no appropriate explanation. Or

a large number of members with unusual addresses or post

office boxes.

e) Staff do not maintain copies of members’ statements.

f) Strong control of an area by a single employee, particularly

if the employee’s position would not normally entail such

duties.

g) Records are not maintained where they should be

(particularly if they are maintained at home).

h) Unknowledgeable, trusting, inactive or self-serving officials.

i) Brief, non-descriptive board minutes; no credit committee

minutes or loan officer minutes.

j) The following could indicate kiting:

• Daily account deposits.

• Multiple checks.

• Sources of deposits from related personal or business

accounts.

• Checks and deposits are made in round dollar

amounts.
Supervisory Committee Guide

WHAT OTHER AUDIT CONSIDERATIONS DO WE NEED TO ADDRESS?

Chapter 22

22-6

• Members frequently request account balance.

• Signator and payee are the same person.

A combination of factors presents a larger risk. Remember that

these are simply warning signs that trigger the need for greater

attentiveness during the audit, or more in-depth review.

What should we

do if we suspect

fraud?

22.10 You should discuss the situation with management,

particularly if you are not certain about what you have found. If

you suspect that the manager is involved in the fraud, you should

report your results to the Board of Directors immediately.

Ensure that the Board of Directors reports the fraud to the

bonding company, and files a Suspicious Activity Report in all

cases of fraud. If:

• The fraud is material (it involves upper management, or

entails a large amount of funds), OR

• You feel that action taken by the Board of Directors is

insufficient to fully address the situation,

then, contact your NCUA Regional Office, your federal examiner

or your SSA immediately.
Supervisory Committee Guide

WHAT OTHER AUDIT CONSIDERATIONS DO WE NEED TO ADDRESS?

Chapter 22

22-7

Appendix 22-A -- ENFORCEMENT RESPONSIBILITY FOR LAWS

AFFECTING CREDIT UNIONS

APPLICABLE LAWS AND ENFORCEMENT AUTHORITIES: FCU’s FISCU’s NFICU’s

B - Equal Credit Opportunity NCUA FTC FTC

BSA - Bank Secrecy Act NCUA NCUA1 TREAS

C - Home Mortgage Disclosure Act NCUA2 NCUA2 NCUA2

CC - Expedited Funds Availability Act NCUA NCUA FED

D - Reserves on Transaction Accounts FED FED FED

E - Electronic Funds Transfer Act NCUA FTC FTC

FCPR - Fair Credit Practice Rule NCUA FTC FTC

FCRA - Fair Credit Reporting Act NCUA FTC FTC

FDCPA - Fair Debt Collection Practices Act NCUA FTC FTC

FDPA - Flood Disaster Protection Act NCUA NCUA FHA/VA

FHA - Fair Housing Act HUD HUD HUD

HIDC - Holder in Due Course FTC FTC FTC

M - Consumer Leasing NCUA FTC FTC

RESPA - Real Estate Settlement and Procedures Act HUD HUD HUD

RFPA - Right to Financial Privacy Act PCA PCA PCA

SSRA - Soldiers and Sailors Relief Act PCA PCA PCA

TIS - Truth in Savings Act NCUA NCUA NCUA

Z - Truth in Lending NCUA FTC FTC

Legend: FED Federal Reserve Board PCA Private Cause of Action

FHA Federal Housing Administration TREAS Treasury Department

FTC Federal Trade Commission VA Veterans Administration

HUD Department of Housing and

Urban Development

1

 For those FISCU’s examined by NCUA.

2

 Enforcement authority also applies to CUSO’s.

NOTE: Although NCUA is not the primary enforcer under some of these regulations, NCUA can

take cease and desist action for violations of any law under Title II of the FCU Act.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 23 -- HOW DO WE REPORT RESULTS?

23.01 What are the reporting requirements of Part 715 of the NCUA Rules

and Regulations?

23.02 What should the audit findings include?

23.03 How can we identify reportable conditions for internal controls?

23.04 What are some examples of reportable conditions?

23.05 What must we do with the report, if anything?

23.06 What is our duty after submitting the audit report?

23.07 When is it necessary to complete and report audit procedures in

addition to the required annual audit?

23.08 What audit procedures should we perform in a supplemental audit?

23.09 Who should we notify if a fraud or illegal act occurs?

What are the

reporting

requirements of

Part 715 of the

NCUA Rules and

Regulations?

23.01 At a minimum, you or your designated representative must

prepare a written audit report and submit it to the Board of

Directors. If an independent, compensated auditor performs the

audit for you, he/she must also provide a written report on any

identified reportable conditions or errors and irregularities he or

she may have discovered in the normal course of performing the

audit. You need not expand audit work to seek to identify

reportable conditions or errors and irregularities, but those

conditions found in the normal course of the audit, if any, he/she

must report to you in writing.

What should the

audit findings

include?

23.02 You need to address whether:

• Internal controls are established and effectively maintained

to achieve the credit union’s financial reporting objectives
Supervisory Committee Guide

How Do We Report Results?

Chapter 23

23-2

that must be sufficient to satisfy the requirements of the

supervisory committee audit, verification of member’s

accounts and its additional responsibilities

• The credit union’s accounting records and financial reports

are promptly prepared and accurately reflect operations and

results.

• The relevant plans, policies, and control procedures

established by the board of directors are properly

administered.

• Policies and control procedures are sufficient to safeguard

against error, carelessness, conflict of interest, self dealing

and fraud.

At a minimum, the audit findings should include any exceptions

noted concerning:

• the lack of internal controls, ‘insufficient accounting records

and financial reports,

• failure of staff to follow plans, policies and procedures

established by the board,

• or sufficient policies and procedures.

How can we

identify

reportable

conditions for

internal controls?

23.03 We designed the internal control checklists in this Guide to

identify potential internal control weaknesses if the answer to a

question is “No”. This is a starting point to determine if a

weakness exists.

Further review may be necessary to determine if a “No” answer is

a reportable condition. For example, smaller credit unions may

have a limited staff size that limits the opportunity for sound

internal controls to be in place. If employees cannot correct poor

internal controls, more involvement from the officials and

supervisory committee will be necessary to offset the weak

internal controls.
Supervisory Committee Guide

How Do We Report Results?

Chapter 23

23-3

What are some

examples of

reportable

conditions?

23.04 You may see the following items as reportable conditions:

(We don't consider this list to be inclusive of all possible

reportable conditions.)

• Weak internal controls.

• Insufficient policies or lack of a required policy.

• Record keeping in arrears.

• Reconcilement lacking for a balance sheet account.

• Financial statement preparation in arrears.

• Missing documentation for expenses.

• Loan exceptions noted in the review of individual loan files.

What must we do

with the report, if

anything?

23.05 You (the supervisory committee) must give the audit report

to the board of directors. The board of directors should review the

audit report at a board meeting. The audit report should be

included in the board meeting minutes. Also, it is beneficial to

meet with the credit union manager or management staff to

discuss the audit findings.

What is our duty

after submitting

the audit report?

23.06 You should follow up with the manager to ensure that

he/she corrects any findings noted in the audit report.

It is advisable to require the board of directors or manager to

complete a written response letter that addresses the corrective

action completed by the manager. The board should include a

written response letter in the board meeting minutes.

You should give the manager a reasonable period of time to

correct the findings noted in the audit report.

You should review all areas of concern to ensure that

management has corrected the audit findings. Proper follow up is

the key to correcting problems noted in the audit report.
Supervisory Committee Guide

How Do We Report Results?

Chapter 23

23-4

When is it

necessary to

complete audit

and report

procedures in

addition to the

required annual

audit?

23.07 You may want to make supplemental audits in addition to

the annual audit. If a fraud or irregularity occurs, you should

complete a supplemental audit or verification.

If a key member of the credit union staff resigns, such as the

manager, you should complete a supplemental audit near the last

day of the individual’s employment.

What audit

procedures

should we

perform in a

supplemental

audit?

23.08 The safeguarding of assets and related party transactions

are the audit issues that you should address. We recommend the

following procedures:

• Count cash and reconcile cash to the general ledger.

• Audit and confirm bank accounts.

• Audit and confirm investments.

• Review and inventory major fixed assets.

• Review all loan files for the individual involved, as well as

related parties.

• Review loan and share account activity for the individual

involved, as well as related parties.

• Review a sample of paid expenses.

Depending on the seriousness of the issue, a verification of

member share and loan accounts may be necessary in addition to

the above procedures.
Supervisory Committee Guide

How Do We Report Results?

Chapter 23

23-5

Who should we

notify if a fraud or

illegal act

occurs?

23.09 You should follow the guidance provided in Letter to Credit

Unions #96-CU-3 dated March 1996. It requires that you

complete a Suspicious Activity Report (SAR).

In addition, if you aren’t certain that a fraud or an illegal act has

occurred, but suspect one may have occurred, you should discuss

this situation with the credit union’s attorney, the NCUA Examiner,

and a representative from the surety bond company.

If you are certain a fraud or an illegal act has occurred, you

immediately notify:

• Local authorities (police).

• Federal Bureau of Investigation (nearest office).

• National Credit Union Administration (NCUA) - Regional

Office, or Fraud Hotline (800) 827-9650.

• NCUA District Examiner or SSA.

• Surety bond company.

Prior to taking action against an employee, we strongly

recommend you consult with the credit union’s attorney.
NOTE: This Guide is addressed to the non-professional volunteer in a credit union operating

in an elementary data processing environment. Compensated auditors should look to the

requirements of the Federal Credit Union Act and the National Credit Union Administration

Rules and Regulations §715.

Chapter 24 -- WHAT MUST A VERIFICATION INVOLVE?

24.01 What is an “Account Verification”?

24.02 Why must we verify accounts?

24.03 How do we send the verification to the members?

24.04 When do we complete the verification?

24.05 Which accounts do we verify?

24.06 What controls do we need to implement for the verification?

24.07 How do we get started?

24.08 What is the difference between a positive and negative confirmation?

24.09 How do we complete the verification?

24.10 What additional steps do we need to take for a positive verification?

24.11 What is a sample?

24.12 What requirements do we need to meet when obtaining a sample?

24.13 How accurate would a sample be?

24.14 How do we determine the method of selection?

24.15 How do we select a sampling plan?

24.16 How do we determine precision, confidence level, and occurrence

rate?

24.17 How do we select a sample?

24.18 What do we do with the statements returned as “undeliverable," or

“moved”?

24.19 What action is appropriate if we receive a notice of an incorrect

balance?

24.20 How do we verify closed accounts?

Appendices

24-A Notice

24-B Positive Verification Letter

24-C Negative Verification Letter

24-D Negative Verification Statement

24-E Tables for Use in Statistical Sampling

24-F Closed Account Verification Letter
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-2

What is an

“Account

Verification”?

24.01 An account verification means requesting members to

respond to you if the activity or balances on their statements are

not accurate. Sometimes a verification is called a confirmation.

Why must we

verify accounts?

24.02 Section 115 of the Federal Credit Union Act requires you,

the supervisory committee, (or your designated representative) to

verify the member’s accounts with the credit union’s records at

least once every two years. You must verify both the accounts

that are currently outstanding, as well as those that members

have closed since the prior closed account verification.

The purpose of the verification is to detect errors, and it is also a

good control to prevent fraud.

How do we send

the verification to

the members?

24.03 You could mail the verification to the members by either

independently mailing:

• A confirmation letter to the members; OR

• The member’s statements of account that includes the

verification notice.

When do we

complete the

verification?

24.04 The date of the verification is at your discretion, as long as

you complete it at least once every two years.

You should consider timing the verification to coincide with a

month the CU normally mails member statements, to reduce

postage and related costs. However, if internal controls are weak,

it may be worth the cost involved to send a separate mailing at a

date that management would not expect.

You could also consider completing the verification with the

annual audit.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-3

Which accounts

do we verify?

24.05 You can verify all accounts, in their entirety, or review a

statistical sample of all accounts. We recommend that you

conduct a verification of all accounts. Verifications are relatively

easy, if the credit union's data processing system can assist you.

Refer to the section “What is a sample?” below for information on

selecting a statistical sample.

What controls do

we need to

implement for the

verification?

24.06 You should ensure the following controls when conducting

the verification:

a) Be sure to use your own or another independent address.

This is true of both the return address on the envelope, and

the contact person for problems. Some supervisory

committees use their outside auditor’s, or their own post

office box.

b) Whenever possible, do not use management or operating

staff to prepare and mail the forms, or select the sample.

The verification should be completed by you, clerical

assistants, or outside professional auditors. In some cases,

you may require staff assistance (for example, when an inhouse data processing system is used). If so, staff should

be well supervised.

c) Distribute a general notice to the membership (possibly

through your newsletter and posting a notice in the credit

union), indicating that the verification is in process. You

could also consider posting a notice in the local newspaper.

There is little need for the notice if you are using a sample,

rather than verifying all accounts. The appendix to this

chapter includes a sample notice (page 24-A).

d) Select a date for the verification that is unknown to staff.

Conducting the verification on a surprise basis allows little

time for anyone to adjust or manipulate records prior to the

verification.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-4

e) Gather all of the information you need when you arrive.

You should maintain control of all records if feasible,

possibly conducting the verification after operating hours

(such as in a small credit union).

How do we get

started?

24.07 To begin the verification:

a) Determine the capabilities available on the computer

system, if you are not familiar with them. The amount of

notice provided to management will directly relate to the

computer services you need. For example, if you want to

print a notice on the member’s statement, it is necessary to

notify management of the verification before they run the

statements. Also ensure that member’s statements are

printed from the same data base used to generate the

individual ledger totals -- it is possible to have a system

generate different listings from the same computer.

You should ask the following questions:

• Can they print the notice on the member’s statements?

If so, this is probably the easiest way to complete the

verification.

• Can they select an appropriate sample on the

computer system, if applicable (reference the following

paragraph)?

• Does the credit union use an outside processor to print

their statements? If so, contact the vendor about two

weeks before the verification to set up the process. If

you know the vendor, it would be preferable to notify

only the vendor (to maintain a surprise verification

date, if possible).

b) Choose the type of verification (positive, negative, or both),

and whether you will use a sample. See 24.08, 24.10 and

24.11.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-5

You should review the requirements of a sample, if

considering this option. Remember that you cannot use a

sample if the member share and loan trial balance does not

tie to the general ledger. If you are considering a sample,

you should verify their accuracy.

If the credit union has weak internal controls (such as in a

small operation), you should negatively confirm all

accounts, and positively confirm a sample. Remember to

include a positive verification if using a sample (as noted

above).

c) Determine whether you will need to print copies of the

verification, or obtain a rubber stamp to use on the

member’s statements. We have included sample

verification notices in the appendix to this guide. Print the

copies, or order the stamp, if necessary.

d) If the credit union accepts member’s requests to not mail

statements, choose an alternate procedure to verify these

accounts. The preferable method is to call the members.

What is the

difference

between a

positive and

negative

confirmation?

24.08 With a positive verification, you send a notice to the

member and expect a reply back, regardless of the accuracy of

the balance.

With a negative verification, you expect a reply only if the balance

is incorrect.

Obviously, with a positive confirmation you know that the member

received and read the notice. A negative confirmation assumes

that accounts are accurate, even if the notice was lost in the mail,

or the member did not read it.

Consider conducting a negative verification of all accounts. With

the assistance of the credit union’s data processing system,

negative account verifications are relatively easy. The data

processing system can simply print a notice on the member’s

regular statement.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-6

You must use a positive account verification, IF using sampling,

• When internal controls are weak (such as in a small credit

union operation), AND

• For dormant accounts, accounts with unusual activity, and

large balance accounts.

How do we

complete the

verification?

24.09 You should complete the following steps:

a) If you will use a sample of accounts, select the sample

(reference the following paragraph for instructions on

computing the sample).

b) If your system will print the verification notice to members

on their monthly statements, closely supervise the staff

involved in printing, stuffing and mailing the statements. If

internal controls are weak (such as in a small credit union),

you should stuff and mail the statements yourselves. Of

course, if the credit union uses a vendor to process their

statements, the independence provided by the third party

greatly reduces the need to maintain supervisory control.

Reference the appendix to this chapter for examples of

notices.

c) Ensure that any statements removed were for “Do not mail”

accounts. Maintain a list of these accounts.

d) If you will complete the verification without assistance,

complete the following steps:

• Obtain the member’s statements

• Include the verification with all of the accounts (or those

you selected in your sample)

• Remove all statements for the “do not mail” accounts,

and maintain a list of these accounts

• Stuff and mail the remaining envelopes
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-7

e) Verify the “Do not mail” accounts by telephone, or the

method previously chosen. If you are not able to contact

the member by telephone, after several attempts, review the

account history. Are there any unusual transactions?

Trace a sample of the transactions in the member’s

account. Does documentation appear reasonable? If there

are unusual or unreasonable transactions, you should

continue to investigate the account and attempt to contact

the member.

f) Retain a copy of the member share and loan trial balance,

and the sample (if used), to document the accounts verified.

What additional

steps do we need

to take for a

positive

verification?

24.10 You should complete the following additional steps for a

positive verification:

a) Check off accounts as the members return the verifications.

b) Review the responses to ensure that there are no

discrepancies noted.

c) About two weeks after the verification, send a second notice

to the members that have not responded.

d) About two weeks after sending the second notices, contact

the member by telephone. You may need to try several

times.

e) If you are still not able to contact the member by telephone,

review the account history. Are there any unusual

transactions? Trace a sample of the transactions in the

member’s account. Does documentation appear

reasonable? If there are unusual or unreasonable

transactions, you should continue to investigate the account

and attempt to contact the member.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-8

What is a

sample?

24.11 Sampling is a process where a representative portion of all

of the member’s accounts are selected. The purpose is to be able

to determine characteristics of the entire population, based on the

review of this representative portion.

While sampling is beneficial in some respects, sampling is not

necessarily feasible or desirable for every supervisory committee.

Smaller credit unions that have a relatively limited number of

accounts will undoubtedly find it easier to conduct a complete

100% verification. From a cost, time, and theory standpoint,

sampling is not usually advantageous when applied to a relatively

small number of accounts.

There are strict procedures that one must follow to determine a

sample.

What

requirements do

we need to meet

when obtaining a

sample?

24.12 IRPS 80-12 addresses sampling requirements for the

verification of accounts. Your statistical sampling should include

all of the following minimum standards:

a) An error (occurrence) rate of 0.5%, a precision level of 1%,

and a confidence level of 95%.

b) A random method of selection that will consist of using:

• Random number tables without replacement;

• Random number generators;

• Systematic selection; OR

• Cluster selection.

c) The following statistical measurement methods:

• Estimation Sampling for Attributes.

• Discovery Sampling.

d) You must use a positive account verification:
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-9

• When internal controls are weak (such as in a small

credit union operation); AND

• For dormant accounts, accounts with unusual activity,

and large balance accounts.

e) You must maintain detailed documentation to support the:

• Sampling method used.

• Random number used to determine the starting point.

• Method of selection, including the interval used.

• Precision level.

• Confidence level.

• Occurrence (error) rate.

You must retain documentation until you complete the next

verification of member’s accounts.

You must complete a verification of ALL members accounts if:

• the sample discloses fictitious or unauthorized

transactions within the sample OR

• the member share and loan trial balance does not

equal the general ledger control account.

A CPA firm may use any method of controlled random statistical

sampling as is consistent with generally accepted auditing

standards (GAAS).

Lack of adherence to these sampling guidelines could be

interpreted as a violation of the Act or the Rules and Regulations.

How accurate

would a sample

be?

24.13 Following these specific guidelines could result in a more

accurate conclusion than examining all data, depending on the

control involved. It may be easier to maintain complete control

over a sample of accounts, than the entire amount. Strict controls

minimize errors and the possibility of hiding fraud.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-10

How do we

determine the

method of

selection?

24.14 Every item in the population must have an equal chance of

being selected. To avoid the possibility that the person selecting

the sample might influence the selection (consciously or not), you

need to use one of the following methods:

a) Random number tables without replacement

b) Random number generators (a random selection provided

by the computer system)

c) Systematic selection (select every “Nth” item in a

population, following a random starting point)

d) Cluster selection (Break down the population into

subgroups, such as inactive accounts, closed accounts, etc.

Then apply the same minimum standards of confidence,

precision, and occurrence (error) rate as to the remaining

population.)

How do we select

a sampling plan?

24.15 You have two options:

a) Estimation sampling. This plan determines the occurrence

rate of certain exception characteristics within a population,

given prescribed ranges of precision and confidence. A

very low occurrence rate is important for your verification.

b) Discovery sampling. This is the preferred method to

search for critical errors. It will locate one exception with a

predetermined level of confidence (providing the exception

exists with a specified error rate within the population of all

members’ accounts).
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-11

How do we

determine

precision,

confidence level,

and occurrence

rate?

24.16 Precision. The possibility exists that the sample results

may not exactly be representative of the population. You can

measure and control (through sample design and size) the

possibility of any material sampling error, by determining the

precision and confidence level. Precision is the range within

which the correct value of the population characteristic most

probably falls. One expresses precision as a plus or minus from

the sample results.

For purposes of the verification, you must limit the precision to

one percent. This will achieve the highest degree of accuracy

reasonably possible.

Confidence Level. Confidence level is the percentage of the time

we can expect the sample results to be representative of the

population, within the stated range of precision. It measures the

reliability of the estimate, and the possibility that the estimated

value of the population characteristic lies outside the precision

limits of the sample.

For purposes of the verification, the confidence level should not

be less than ninety-five percent. Again, this will achieve the

highest degree of accuracy reasonably possible.

Occurrence (Error) Rate. Occurrence rate is the rate of error

within the population.

To ensure the detection of fictitious accounts and manipulation of

a member’s account, the maximum acceptable occurrence rate

will not be greater than .5 percent.

How do we select

a sample?

24.17 The sampling plan must offer each member’s account,

open or closed, an equal chance of being selected. The total

population needs to include all accounts, including inactive

accounts. We recommend the following method.

a) Determine the population. In our example, we will assume

there is a population of 8,000 accounts.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-12

b) Determine the expected occurrence (error) rate. We will

use the maximum allowed, or .5%.

c) Specify the precision and confidence level. We will use the

1% upper precision limit, and a confidence level of 95%.

d) Determine the required sample size.

e) We will use “Estimation Sampling”; refer to the appendix of

this chapter, Table 1 in Appendix 24E. Read down the

column until you find the upper precision limit of one

percent. The corresponding sample size is 1,000 accounts.

If you choose to use “Discovery Sampling”, use Table 2 to

obtain the “reliability factor”. Using our confidence level of

95%, and reading across the table, the reliability factor is

3.0%. You compute the sample size as follows:

 Sample size = reliability factor / occurrence rate

OR = 3.0% / .5%

 = 600 accounts.

If you do not disclose fraudulent or unauthorized transactions,

you can be 95% certain that there are none present (given

that no more than .5% of the member’s accounts contain

such activity).

f) Select the accounts to be included in the sample. Select the

sample using one of the methods discussed above --

random number tables, random number generators,

systematic random sampling, or a fully encompassing

cluster selection. If your data processing system has the

capability of conducting a random sample of all member

accounts, this would be the easiest method. Be sure to

include ALL accounts in your selection process.

Obtain a copy of the member share and loan trial balance.

You may need this to select your sample, or to provide

documentation of the population. You may need to obtain

more than one trial balance (for example, sometimes

certificates of deposit are listed on a separate trial balance).

Tie the share and loan trial balance to the general ledger
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-13

control accounts, if you have not already done this. If they do

not tie, complete a 100% verification of member’s accounts.

Complete the verification, as noted above.

g) Retain documentation to support your verification.

You must retain the:

• Sampling method used.

• Random number used to determine the starting point.

• Method of selection, including the interval used.

• Precision level.

• Confidence level.

• Occurrence (error) rate.

Be sure to retain the list of accounts that you verified. The

list will provide evidence that you verified the accounts, and

you can use it as a checklist for noting the return of

verifications in a positive verification. Also retain the entire

share and loan trial balance, to provide documentation of

the population you selected the accounts from (you could

retain this on a disk).

What do we do

with the

statements

returned as

“undeliverable”,

or “moved”?

24.18 For all undeliverable statements;

a) Determine the reason for the return.

b) Contact the credit union to find out if they received a current

address. If not, wait a few weeks and try again.

c) The verification can still be considered valid, provided you

exhaust every available means to reach the member.

Simply review the statements for unusual or unreasonable

activity.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-14

What action is

appropriate if we

receive a notice

of an incorrect

balance?

24.19 For all statements with a potential discrepancy, complete

the following:

a) Research the reason for the discrepancy with staff. Is it

simply a timing difference?

b) If you discover a credit union error, contact the member to

inform him/her of the error. Ensure that the error is

corrected immediately.

To evaluate the impact of the error, and need for further

research, consider the following questions:

• Does the error have a material impact on the credit

union’s financial statements?

• Does the error cause an out-of-balance condition

between the member share and loan trial balance, and

the general ledger?

• Was the error intentional or unintentional

• Was it the result of carelessness or misunderstood

instructions?

• Did it occur frequently?

• Was the error systematic or random?

c) If the credit union’s records appear accurate, and you are

unable to determine how the member came up with the

balance he believes is in his account, contact the member.

Request an explanation, and research further if necessary.

d) Notify the board of directors and your examiner immediately

if you:

• Are unable to resolve the difference.

• Feel an error is material (through the questions on “b)”

above).

• Suspect possible fraud.
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

24-15

How do we verify

closed accounts?

24.20 Closed accounts are verified in much the same manner as

the bi-annual verification. We strongly recommend that you verify

closed accounts at least every few months. Closed accounts are

susceptible to undetected errors and fraud, more so than current

accounts. Balances on inactive accounts can be easily

transferred to other accounts then closed. Your verification must

confirm members know their accounts have been closed. You

must verify closed accounts at least with the bi-annual verification.

If you can arrange to automatically receive the closing statements

for members each month/quarter, using the statements to send

the letter reduces postage costs and saves time.

Your verification steps:

a) Obtain lists of accounts closed since the previous closed

account verification.

b) If you do not plan to verify all closed accounts, obtain a

sample (reference “How do I choose a sample?” above).

c) Develop the number of letters you will need.

d) Enclose a letter in each statement, if applicable, while

checking the member off of the closed account statement.

Or address envelopes using the credit union’s address list.

e) Mail the letters

f) Retain a copy of the closed account lists that indicate the

accounts that you verified. This will provide evidence that

you completed the verification.
Supervisory Committee Guide for CU’s

WHAT MUST A VERIFICATION INVOLVE?

Appendices - Chapter 24

Appendix 24-A --Verification Notice

Notice to the members of

XYZ Credit Union

The supervisory committee recently distributed a notice to all members,

requesting you to verify that the balances listed on (your monthly statement/the

verification notice) are accurate. If you did not receive your verification form, or

if you find discrepancies on the form, please contact the supervisory committee

at:

Mr. Paul Roberts, Chairman

Supervisory Committee

PO Box 123

Anywhere, MT 59404
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Appendices - Chapter 24

Appendix 24-B -- Example of a Positive Verification Letter

(USE CREDIT UNION LETTERHEAD)

(date)

XYZ Credit Union

Anywhere, MT 59404

(name and address of member)

Account No.

We, the supervisory committee, are conducting a verification of member accounts, and

would appreciate your assistance. Please compare the balances shown below with the

corresponding balances shown by your records. Indicate whether your account is

correct, then sign and return this form to:

Mr. Paul Roberts, Chairman

Supervisory Committee

PO Box 123

Anywhere, MT 59404

Thank you in advance for your assistance.

Date ____________________

Share Balance ____________________

Loan Balance ____________________

The balances reflected above are correct _________________________________

Your signature

The balances reflected above should be:

Share Balance ____________________

Loan Balance ____________________

I have noted the correct balances above ____________________________________

Your signature
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Appendices -- Chapter 24

Appendix 24-C -- Example of a Negative Verification Letter

(USE CREDIT UNION LETTERHEAD)

(date)

Supervisory Committee

XYZ Credit Union

Anywhere, MT 59404

(name and address of member)

Account No.

We are conducting a verification of member accounts, and would appreciate your

assistance. Please compare the balances shown below with the corresponding

balances shown by your records. If the balances do not agree with your records,

please report any differences immediately to:

Mr. Paul Roberts, Chairman

Supervisory Committee

PO Box 123

Anywhere, MT 59404

Thank you in advance for your assistance.

Date ____________________

Share Balance ____________________

Loan Balance ____________________
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Appendices - Chapter 24

Appendix 24-D -- Example of a Negative Verification Statement

The supervisory committee is verifying member records. Please compare these

balances with your records. If they do not agree, please report any differences

immediately to:

Mr. Paul Roberts, Chairman

Supervisory Committee

PO Box 123

Anywhere, MT 59404

We will consider the balances correct unless we hear from you within the next 10 days.

Thank you for your assistance!
Supervisory Committee Guide for CU’s

WHAT MUST A VERIFICATION INVOLVE?

Appendices - Chapter 24

Appendix 24-E -- Tables for Use in Statistical Sampling

Table for Use in Estimation Sampling

 Precision Level Sample Size

2.4 200

1.6 400

1.3 600

1.1 800

1.0 1,000

 .8 2,000

Table for Use in Discovery Sampling

 Confidence Level Reliability Factor

90% 2.3

95% 3.0

96% 3.2

97% 3.4

98% 3.7

99% 4.3
Supervisory Committee Guide

WHAT MUST A VERIFICATION INVOLVE?

Chapter 24

Appendix 24-F -- Example of a Closed Account Verification Letter

(USE CREDIT UNION LETTERHEAD)

(date)

Supervisory Committee

XYZ Credit Union

Anywhere, MT 59404

(name and address of member)

Account No.

Our records reflect that you closed your account, and that we remitted the balance in

the account of (balance) on (date). If you did not receive these funds, please contact

us at:

Mr. Paul Roberts, Chairman

Supervisory Committee

PO Box 123

Anywhere, MT 59404

Unless you report any differences to us within 30 days, we will assume that this

information is correct.

We are always concerned when a member leaves, and would like to offer you the

opportunity to contact us with any concerns you may have about the credit union as

well. Thank you.

Sincerely,

Supervisory Committee

XYZ Credit Union

(Note to the committee: you could consider using this letter as a survey to find out why

members closed their accounts)
NOTE: This Guide is addressed to the non-professional volunteer in a credit union

operating in an elementary data processing environment. Compensated auditors should

look to the requirements of the Federal Credit Union Act and the National Credit Union

Administration Rules and Regulations §715.

Chapter 25 - FINAL AUDIT CHECKLIST

This checklist documents the completion of each main audit area. The

supervisory committee member(s) completing each specific area places their

initials and completion date in space provided below.

Completed By:

CHAPTER PROCEDURE Initials Date

8 -

Cash

1. Did you review internal controls for Cash?

2. Did you complete audit procedures for Cash,

including written confirmation of balances?

3. Did you complete work papers for Cash?

9 -

Investments

1. Did you review internal controls for

Investments?

2. Did you complete audit procedures for

Investments, including written confirmation

of balances?

3. Did you complete work papers for

Investments?

10 -

Loans

1. Did you review internal controls for loans?

2. Did you complete the audit procedures for

loans?

3. Did you complete work papers for loans?
Supervisory Committee Guide

Final Audit Checklist

Chapter 25

Completed By:

CHAPTER PROCEDURE Initials Date

25-2

11 -

A.L.L.

1. Did you review the internal controls for the

Allowance for Loan Losses?

2. Did you complete the audit procedures for

the Allowance for Loan Losses account?

3. Did you complete work papers for the

Allowance for Loan Losses?

12 -

Fixed

Assets

1. Did you review internal controls for Fixed

Assets?

2. Did you complete audit procedures for Fixed

Assets?

3. Did you complete work papers for Fixed

Assets?

13 -

Other

Assets

1. Did you review internal controls for Other

Assets?

2. Did you complete audit procedures for Other

Assets?

3. Did you complete work papers for Other

Assets?

14 -

Other

Liabilities

1. Did you review internal controls over Other

Liabilities?

2. Did you complete audit procedures for Other

Liabilities?

3. Did you complete work papers for Other

Liabilities?
Supervisory Committee Guide

Final Audit Checklist

Chapter 25

Completed By:

CHAPTER PROCEDURE Initials Date

25-3

15 -

Borrowed

Money

1. Did you review internal controls for

Borrowed Money?

2. Did you complete audit procedures for

Borrowed Money?

3. Did you complete work papers for Borrowed

Money?

16 -

Shares

1. Did you review internal controls for Shares?

2. Did you complete audit procedures for

Shares?

3. Did you complete work papers for Shares?

17 -

Equity

1. Did you review internal controls over Equity?

2. Did you complete audit procedures for

Equity?

3. Did you complete work papers for Equity?

18 -

Income

1. Did you review internal controls for Income?

2. Did you complete audit procedures for

Income?

3. Did you complete work papers for Income?
Supervisory Committee Guide

Final Audit Checklist

Chapter 25

Completed By:

CHAPTER PROCEDURE Initials Date

25-4

19 -

Expenses

1. Did you review internal controls for

Expenses?

2. Did you complete audit procedures for

Expenses?

3. Did you complete work papers for

Expenses?

20 -

Related

Parties

1. Did you review internal controls over Related

Party Transactions?

2. Did you complete audit procedures for

Related Party Transactions?

3. Did you complete work papers for Related

Party Transactions?

23 -

Written

Report

1. Did you complete a written report for your

audit findings?

2. Did you submit the written report to the

board of directors?

3. Did you follow up on the audit findings with

management to ensure corrective action?

24 -

Verifications

1. Have you completed a share and loan

account verification at least once every two

years?

2. Did you perform an 100 percent verification

or a controlled random statistical sample?
Supervisory Committee Guide

Final Audit Checklist

Chapter 25

Completed By:

CHAPTER PROCEDURE Initials Date

25-5

3. Did you prepare a written report of results

whether a separate report or included in the

findings of your audit report?
GLOSSARY OF TERMS

Accounting system refers to one of the elements of a credit union’s internal

control structure, includes the following:

Quality of the books and record keeping system;

Maintenance of accounting records;

Financial reporting system, and

Preparation of accurate financial statements.

ACH refers to an automated clearing house (ACH).

Agreed-upon

procedures

engagement

refers to the performance by an independent, licensed

certified public accountant of an engagement in which the

scope is limited to applying specified agreed-upon

procedures to one or more specified elements, accounts or

items of a financial statement. Such procedures are

insufficient to express an opinion regarding either the

financial statements taken as a whole, or the specified

elements, accounts or items under examination.

Allowance for Loan

Losses

refers to a valuation allowance used to record

management’s estimate of potential loan losses that may

occur in the collection of outstanding loans and loan derived

assets. The estimate includes a historical reserve amount

based on the past history of experienced loan losses, as

well as the individual classification of delinquent or other

problem loans.

Analytical

procedures

refers to one of the categories of substantive tests.

Analytical procedures are tests applied to the total recorded

amounts and are based on the existence of plausible and

consistent relationships among financial statement

elements or between financial and non-financial amounts.

Annual audit refers to a thorough review of records and transactions for

the period beginning the first day following the previous

annual audit to the effective date of the current audit. The

period may cover more or less than a 12 month period. The

annual audit is required once each calendar year.
Supervisory Committee Guide

Glossary of Terms

GL-2

Assets refers to items owned by the credit union. Examples of

assets are loans, cash, investments, fixed assets, etc.

Assets acquired in

liquidation

refers to assets which were collateral for a secured loan

and are now in the possession of the credit union until sold.

ATM refers to an automated teller machine (ATM).

Bank Secrecy Act refers to the Financial Record keeping and Reporting of

Currency and Foreign Transactions Reporting Act. This Act

requires record maintenance and reporting of certain

transactions to the Internal Revenue Service. Refer to Part

748.2 of the NCUA Rules and Regulations. Independent

testing for compliance by credit union personnel or outside

parties is required.

Budget variance

report

refers to a report completed by management which is used

to compare actual income and expense results with

budgeted amounts.

Compensated auditor refers to any accounting/auditing professional, excluding

credit union employees, who is compensated for performing

more than one compensated supervisory committee audit

and/or verification of members’ accounts, or opinion audit,

per calendar year.

Confidential

transactions

refers to any business transaction or account of a member

which may not be discussed with persons other than the

officials of the credit union who are directly involved in the

activity or discussion.

Confirmation refers to a written verification with a person or organization

pertaining to an account balance or condition. Examples of

confirmation letters are bank/corporate credit union account

confirmation, investment account confirmation, borrowing or

line of credit confirmation, attorney letter confirmation, and

member share/loan account confirmation.

Contingency liability refers to estimated future expenses which must be accrued

for in accordance with generally accepted accounting

principles.
Supervisory Committee Guide

Glossary of Terms

GL-3

Control environment refers to one of the elements of the internal control

structure, includes the following:

• Management policies and plans;

• Organizational structure;

• Involvement of board of directors, credit and supervisory

committees;

• Assignment of authority and responsibility;

• Personnel policies, and

• NCUA Supervisory Examination.

Control procedures refers to one of the elements of a credit union internal

control structure, includes the following:

• Appropriate authorization of transactions;

• Sound segregation of duties;

• Safeguarding of credit union assets;

• Security access level and controls over the EDP system,

and

• Management/supervisory committee periodic reviews

and test checks.

Credit refers to an entry on the credit union’s books/records to

reduce asset accounts, increase liability/equity accounts,

increase income accounts and decrease expense accounts.

Debit refers to an entry on the credit union’s books/records to

increase asset accounts, decrease liability/equity accounts,

increase expense account and decrease income accounts.

Deferred credits refers to income received but not yet earned.

Depreciation refers to the expense recognized over the useful life of a

fixed asset.

EDP refers to electronic data processing (EDP) or a

computerized system. The term for automated credit

unions.

Engagement letter refers to the written engagement of an independent,

compensated auditor to perform all or a portion of the scope

of a supervisory committee audit.
Supervisory Committee Guide

Glossary of Terms

GL-4

Financial statements refers to a presentation of financial data, including

accompanying notes, derived from accounting records of

the credit union, and intended to disclose a credit union’s

economic resources or obligations at a point in time, or the

changes therein for a period of time, in conformity with

GAAP or RAP, as defined herein. Each of the following is

considered to be a financial statement: a balance sheet or

statement of financial condition; statement of income or

statement of operations; statement of undivided earnings;

statement of cash flows; statement of changes in members’

equity; statement of assets and liabilities that does not

include members’ equity accounts; statement of revenue

and expenses; and statement of cash receipts and

disbursements.

Fixed Assets refers to tangible assets such as land, building, furniture,

fixtures, equipment, building/leasehold improvements, as

well as lease payments, as defined in Part 701.36 of the

NCUA Rules and Regulations.

GAAP is an acronym for “generally accepted accounting

principles” which refers to the conventions, rules, and

procedures which define accepted accounting practice.

GAAP includes both broad general guidelines and detailed

practices and procedures, provides a standard by which to

measure financial statement presentations, and

encompasses not only accounting principles and practices

but also the methods of applying them.

GAAS is an acronym for “generally accepted auditing standards”

which refers to the standards approved and adopted by the

American Institute of Certified Public Accountants which

apply when an “independent, licensed certified public

accountant” audits financial statements. Auditing standards

differ from auditing procedures in that “procedures” address

acts to be performed, whereas “standards” measure the

quality of the performance of those acts and the objectives

to be achieved by use of the procedures undertaken. In

addition, auditing standards address the auditor’s

professional qualifications as well as the judgment exercised

in performing the audit and in preparing the report of the

audit. Copies of GAAS may be obtained from the AICPA,

Order Department, Harborside Financial Center, 201 Plaza

Three, Jersey City, NJ 07311-3881, telephone (800) TOAICPA or (800) 862-4272.
Supervisory Committee Guide

Glossary of Terms

GL-5

General Ledger refers to the record of final entry on the credit union’s

books. The general ledger contains summaries of all

transactions which affect, assets, liabilities, retained

earnings, income and expense. The general ledger is also

the source of information for the monthly financial

statements.

In-house draft

account

refers to an internal share draft (checking) account used by

a credit union to issue checks for credit union business.

Independence and

Independent

means the impartiality necessary for the reliability of the

compensated auditor’s findings. Independence requires the

exercise of fairness toward credit union officials, members,

creditors and others who may rely upon the supervisory

committee audit report.

Internal controls refers to the process, established by the credit union’s board

of directors, officers and employees, designed to provide

reasonable assurance of reliable financial reporting and

safeguarding of assets against unauthorized acquisition,

use, or disposition. A credit union’s internal control structure

consists of five components: control environment; risk

assessment; control activities; information and

communication; and monitoring. Reliable financial reporting

refers to preparation of financial statements that “present

fairly” the financial position of the credit union and results of

its operations and its cash flows, in conformity with GAAP or

RAP, as defined herein. Internal control over safeguarding

of assets against unauthorized acquisition, use, or

disposition refers to prevention or timely detection of

transactions involving such unauthorized access, use, or

disposition of assets which could result in a loss that is

material to the financial statements.

Investments refers to excess funds (not loaned out) which are

purchased to obtain income-producing assets. The specific

types of investments a credit union may purchase are listed

in Section 107 of the Federal Credit Union Act and Part 703

of the NCUA Rules and Regulations.

Journal and Cash

Record (JCR)

refers to the records or books of original entry. The

financial transactions of the credit union are recorded each

business day in this record. In manual credit unions the

JCR is used to record all transactions. In automated credit

unions, the general ledger is used to record all transactions.

Judgmental sampling refers to non-statistical sampling. The sample is selected

using one’s judgment.
Supervisory Committee Guide

Glossary of Terms

GL-6

Liabilities refers to amounts which the credit union owes to others,

such as Accounts Payable, Borrowed Money, Taxes

Payable. etc.

Licensed, certified

public accountant

refers to an accounting/auditing professional who has

received a certificate and license from a duly-appointed

state licensing authority to practice accounting/auditing, and

is independent as defined herein.

Loan Exceptions refers to incorrect practices, incomplete documentation,

missing documents, poor lending practices, violations of

loan policy or violations of the NCUA Rules & Regulations

noted during the review of loans.

Manual credit union refers to a non-automated credit union. A credit union

without an electronic date processing (EDP) system.

Materiality refers to a statement, fact or item, which, giving full

consideration to the surrounding circumstances as they

exist at the time, it is of such a nature that its disclosure, or

the method of treating it, would be likely to influence or to

make a difference in the judgment and conduct of a

reasonable person.

Non-post draft

account

refers to a general ledger account (accounts receivable)

used to record member share drafts which have not

properly cleared.

Note Payable refers to a loan note given to the lender for funds borrowed

by the credit union. The total owed by the credit union is

recorded on the general ledger account Notes Payable.

Off-line loans refers to loan balances (accounts) not on the credit union’s

main electronic data processing (EDP) system.

Opinion audit refers to an examination of the financial statements

performed by an independent, licensed, certified public

accountant in accordance with GAAS. The objective of an

“opinion audit” is to express an opinion as to whether the

financial statements of the credit union present fairly, in all

material respects, the financial position and the results of its

operations and its cash flows in conformity with GAAP or

RAP, as defined herein.

OREO refers to other real estate owned (OREO). An OREO is real

estate property which has been foreclosed by the credit

union and is recorded as an asset pending liquidation.
Supervisory Committee Guide

Glossary of Terms

GL-7

Random statistical

sampling

refers to a sampling which offers objective criteria, based

on probability, for determining sample size and evaluating

the results of a sample.

RAP is an acronym for “regulatory accounting practices” which

refers to the conventions, rules, and procedures governing

accepted accounting practices, other than GAAP, for credit

unions and having the substantial support of either the

NCUA or the applicable state credit union supervisor.

Reconcilement refers to the document or schedule prepared to bring into

agreement two separate balances. The general ledger

account balance is brought into agreement to supporting

documentation/records.

Related party

transactions

refers to transactions among or between parties where one

party controls or can significantly influence the

management or operating policies of the other so as to

prevent the other party from pursuing exclusively its own

interests. Examples of related parties include: executive

management, board members, supervisory committee

members, credit committee members, employees, and

family members of these groups. Examples of “related

party transactions” include: interest-free loans or loans at

below market rates; sale of real estate significantly below

appraised value; nonmonetary exchange of property; below

market fees, and making of loans lacking scheduled terms

for repayment.

Reportable

conditions

refers to a matter coming to the attention of the

independent, compensated auditor which, in his or her

judgment, represents a significant deficiency in the design

or operation of the internal control structure of the credit

union, which could adversely affect its ability to record,

process, summarize, and report financial data consistent

with the representations of management in the financial

statements.

Reserves refers to portions of earnings allocated for use for a specific

purpose, such as the Regular Reserve and the Allowance

for Loan Losses account.

Specified elements,

accounts or items of

a financial statement

refers to accounting information that is a part of, but

significantly less than, a financial statement. These may be

directly identified in a financial statement or notes thereto;

or they may be derived from a financial statement by

analysis, aggregation, summarization, or mathematical

computation.
Supervisory Committee Guide

Glossary of Terms

GL-8

Substantive testing refers to testing of details and analytical procedures to

detect material misstatements in the account balance,

transaction class, and disclosure components of financial

statements.

Supervisory

committee

refers to a supervisory committee as defined in Section

111(b) of the Federal Credit Union Act, 12 U.S.C. 1786(r).

For some federally-insured state chartered credit unions,

the “audit committee” designated by state statute or

regulation is the equivalent of a supervisory committee.

Supervisory

committee audit

refers to an examination of specified elements, accounts or

items of the credit union’s financial statement to the full

extent required in this part. An opinion audit as defined

herein exceeds the requirements of a “supervisory

committee audit.”

Supplemental audits refers to audits or audit procedures completed in addition to

the required annual audit. For example, supplemental

audits may be performed after a manager resigns or is

terminated.

Surety bond

coverage

refers to the protection by a surety bonding company which

provides for the recovery of losses by the dishonesty of an

employee or official or by the failure of employees to

faithfully perform their duties. The specific losses that will

be restored by the bond are listed in the written contract

with the surety company.

Suspense accounts refers to general ledger accounts used for unposted

transactions until the transactions are posted to member’s

accounts. Suspense accounts may be established for:

unposted insurance premium withdrawals, unposted share

drafts, unposted payroll deposits and transfers, unposted

automated clearing house transactions, and unposted

automated teller machine transactions.

Test check refers to a review of a sample portion of activities, rather

than all of the activities.

Test of balances refers to one of the categories of substantive tests. Test of

balances are procedures applied to the individual items that

compose an account balance or class of transactions. The

tests involve confirmation, inspection, or observation

procedures to provide evidence about the recorded amount.

Test of balances provide stronger evidence and are more

effective.
Supervisory Committee Guide

Glossary of Terms

GL-9

Trial balance of

general ledger

refers to the listing of debit and credit balances for all credit

union general ledger accounts. The sum of the debit and

credit balances should be equal.

Trial balance of

member share and

loan accounts

refers to the listing of all member share and loan account

balances and other information fields relating to account

information. The trial balance of member share and loan

accounts are commonly produced in numeric or

alphabetical order. The total of the member share and loan

accounts are reported on the summary page at the end of

this report.

Undivided Earnings refers to the portion of the accumulated earnings of the

credit union which are available for the payment of

dividends.

Verification refers to the comparison of one record to another to

determine the accuracy of the records. For example, one

may compare a member’s record of share and loan

balances with the credit union’s record of share and loan

balances.

Verification of

member accounts

refers to the procedure employed by the supervisory

committee which verifies the accuracy of share and loan

balances recorded on the credit union’s records. By

regulation, a verification must be performed at least once

every two years.

Working papers refers to the principal record, in any form, of the work

performed by the auditor and/or supervisory committee to

support its findings and/or conclusions concerning

significant matters. Examples include the written record of

procedures applied, tests performed, information obtained,

and pertinent conclusions reached in the engagement,

proprietary audit programs, analyses, memoranda, letters of

confirmation and representation, abstracts of credit union

documents, reviewer’s notes, if retained, and schedules or

commentaries prepared or obtained by the independent,

compensated auditor.
MINIMUM PROCEDURES

APPENDIX A

SUPERVISORY COMMITTEE GUIDE – MINIMUM PROCEDURES

Foreword

This Appendix presents minimum procedures which a supervisory committee or its

independent accountant or other accountant must complete when a Supervisory Committee

chooses the Supervisory Committee Guide option for completing its annual audit requirement

under Part 715 of the NCUA Rules and Regulations (Part 715).

This Supervisory Committee Guide option may not be adequate for all credit unions; it is

designed for small credit unions. If the credit union is of a larger asset size or higher level of

complexity, the supervisory committee should consider a higher level of engagement either:

an opinion audit of the financial statements; an examination of internal controls over call

reporting; or an opinion audit of the balance sheet only; all performed by a licensed

individual. NCUA or the appropriate state supervisor will be evaluating the adequacy of the

supervisory committee audit in its annual examination including the level of engagement the

supervisory committee chooses to meet its requirements under Part 715.

The supervisory committee, its independent accountant or other accountant may also need to

perform additional procedures to supplement these minimum procedures if the specific

circumstances of a particular credit union so dictate. The supervisory committee must apply

its judgment in determining the procedures necessary to meet Guide requirements. By

publishing this Appendix, NCUA is not representing that a supervisory committee which

performs or has performed these minimum procedures, and these procedures only, will have

fully meet the requirements of Part 715. The committee remains responsible to ensure that a

complete set of procedures is performed.

Any time the procedure includes making a selection, the supervisory committee’s report, its

independent accountant’s report or other accountant’s report on minimum procedures should

delineate the method of selection and the number of selected items. Additionally, because the

independent accountant takes no responsibility for the sufficiency of the procedures in an

minimum procedures engagement, he or she may need to consult with the supervisory

committee about the number of items selected for testing and the selection criteria.

The testing dates should be disclosed in the supervisory committee’s report, its independent

accountant’s report or other accountant’s report on minimum procedures.

INTERNAL CONTROL

Teller controls

• Observe that the balancing and replenishment of an ATM is performed by two individuals

(on a surprise basis).

• Determine for a selected number [number to be determined in consultation with the

supervisory committee] of tellers that access is restricted to their own accounts.
MINIMUM PROCEDURES

APPENDIX A

App A-2

• Obtain a selected number [number to be determined in consultation with the supervisory

committee] of individual teller work and verify that all checks and cash items for each

day were deposited by the next day by tracing to [describe supporting documentation].

Dormant Accounts (for shares and share drafts)

• Obtain an authorization/privilege report and disclose all individuals who have override

authority for dormant accounts.

• If returned member statements are retained, determine that access is restricted and

describe the control.

• Obtain a selection [number to be determined by the supervisory committee] of no-mail

accounts and verify that a member authorization has been received.

Share File Maintenance

• Inquire if share file maintenance transactions are reviewed / approved by a different

individual than the individual initiating the transaction. Report which individual performs

the function.

• Obtain a selection [number to be determined by the supervisory committee] of change of

address file maintenance forms and perform the following:

• Trace to the member’s written authorization.

• Trace to proper approval / review.

Wire Transfers

• Obtain the wire transfer authorization record and report who has authority to perform

wire transfers. Indicate if these individuals have correspondent account reconciliation

responsibility.

BANK RECONCILIATIONS

Obtain a listing of correspondent financial institution accounts, make a selection of those

accounts and perform the following procedures:

• Obtain reconciliations of the accounts and compare the balance per the credit union to the

general ledger.

• Obtain a written confirmation from the correspondent financial institution for the

accounts. Compare the amount on the confirmation to the amount per the correspondent

financial institution included on the reconciliation.

• Test the mathematical accuracy of the account reconciliations.

• Determine by reference to the preparer date included on the account reconciliations that

the preparer date was within CU policy (disclose policy).

• By reference to the date beside each reconciling item on the reconciliations, determine

whether any reconciling items originated in excess of ___ (number of days to be

established by the supervisory committee) days prior to the reconciliation date. Include

any such items in the minimum procedures report.
MINIMUM PROCEDURES

APPENDIX A

App A-3

• Make a selection of reconciling items and agree to clearing in subsequent bank statements

or [describe specific supporting documentation of resolution.]

TELLER SUMMARY SHEETS

Obtain a listing of teller and vault summary sheets and perform the following procedures:

• If one branch, make a selection of teller and vault summary sheets and compare the totals

to the general ledger.

• If multiple branches, make a selection of branches and compare the branch totals to the

general ledger. Make a selection of individual teller and vault summary sheets and

compare the totals to the branch summary.

• Test the mathematical accuracy of the teller and vault summary sheets selected above.

LOANS

Reconciliation

Compare the balance of loans and accrued interest receivable on the loan subsidiary ledger to

the general ledger. If the amounts do not agree, obtain a CU prepared reconciliation of the

loan subsidiary ledger to the general ledger and

1.) Test the mathematical accuracy of the reconciliation,

2.) Compare the amount reported as the subsidiary ledger balance for both loan

principal and accrued interest receivable to the subsidiary ledger,

3.) Compare the amount reported as the general ledger balance to the general ledger

4.) Make a selection of reconciling items and compare to [describe specific

supporting documentation of resolution.]

Note: The above procedures are to be performed as of the confirmation/ verification

date, if applicable.

Approval and processing

Obtain a listing of loans granted during the testing period and make a selection from the

listing [the selections should be in proportion to the types of loans granted during the period

and the selection should include ___ (number to be determined in consultation with the

supervisory committee) related party loans originated during the period]. Obtain the loan

application, note, appraisal, title and other documents [describe documents] and perform the

following:

• Observe whether approvals are documented in accordance with the CU’s loan policy

[state policy].

• Determine that a note is on file and signed by the member

• Determine that the collateral for the loan has been recorded otherwise perfected to

indicate the Credit Union as lien holder.

• Compare the fair value of the collateral (obtained by the credit union) with the loan

amount and determine whether the loan amount falls within the minimum loan to value
MINIMUM PROCEDURES

APPENDIX A

App A-4

requirements included in the CU’s loan policy [state policy and indicate the source of the

fair value for each loan].

• Compare the interest rate, term, note date, and collateral code included in the original

loan documentation to the same terms entered into the computer system.

• Determine if a different individual as evidenced by [describe supporting documentation]

is responsible for each of the following functions:

• Loan approval

• Loan disbursement

• Loan processing (input or ‘set up the loan’ on the subsidiary ledger)

Loan file maintenance

• Obtain the authorization / privilege report and document which individuals have the

authority for all three of the following:

1. To approve loans,

2. To process loans

3. For file maintenance

• Inquire if loan file maintenance transactions are reviewed / approved by a different

individual than the individual initiating the transaction. Report which individuals

performs the review / approval function.

Obtain a selected number of days [to be determined in consultation with the supervisory

committee] of file maintenance change reports and perform the following:

• Check for advances of maturity or due dates or address change. For those identified,

verify that a modification or extension agreement exists and is signed by the member.

• Trace to proper authorization / review.

• If file maintenance change reports (or a record of changes with appropriate authorization)

are not available, disclose in the report.

Delinquencies

Using two consecutive months of delinquency reports, identify a selected number of loans

that appear on the earlier delinquency report but not on the later delinquency report.

Document the reason for removal or disposition such as:

• Charged-off (Compare to listings of board approved charge offs)

• Refinanced (Observe new note and state whether or not the principal balance was reduced

in the refinancing)

• Payments received (Compare payments received to the member account payment history)

Confirmation/Verification

Make a selection of loans for positive and / or negative confirmation / verification [describe

parameters/scope/date] and confirm directly with the member the following: (Regulatory

requirement for performance is every two years.)

• Current loan amount

• Interest rate
MINIMUM PROCEDURES

APPENDIX A

App A-5

Note: Perform reconciliation procedures as of the confirmation/ verification date.

Accrued Interest Receivable

Make a selection of loans from the loan subsidiary ledger and compare the amount of accrued

interest receivable with the terms of the note (and recalculate the amount of accrued interest

in accordance with the terms of the note,). For a recent payment, compare the amounts of

principal and interest paid to the terms of the note.

ALLOWANCE FOR LOAN LOSSES

Obtain the following documents from the CU:

• Activity in the allowance for loan losses for the testing period which includes beginning

balance, provision for loan losses, charge-offs, recoveries and ending balance.

• Detail listings of charge-offs and recoveries by month.

• Management’s support of the ALLL calculation which typically includes a listing of rated

and classified loans and general reserves.

Perform the following:

• Test the schedules for mathematical accuracy.

• Compare the beginning balance, ending balance and provision expense from the activity

schedule to the general ledger.

• Compare the totals on the detail listings of charge-offs and recoveries to the summary

analysis of the allowance activity.

• Compare selected monthly charge offs to approvals of such charge offs in the minutes of

the meetings of the Board of Directors of the CU.

• Compare the required allowance for loan losses according to the analysis to the amount

reported on the general ledger.

Obtain a listing of collateral held in the process of liquidation, which includes both the cost

and market value of each item of collateral and perform the following procedures:

• Test the schedule for mathematical accuracy

• Compare the total on the listing to the general ledger

• Identify from the schedule any items for which the cost exceeds the market value and

determine that the collateral is recorded in the general ledger at the lower of the two

values.

• Determine that the items were transferred from loans to collateral in process of

liquidation at estimated fair value by reading internal documentation and agreeing any

losses to the detailed listing of charge-offs.

Make a selection of assets sold and compare the cash proceeds to the book value of the

collateral in process. Compare the difference between the book value and cash proceeds to

the recording in a general ledger gain or loss account.
MINIMUM PROCEDURES

APPENDIX A

App A-6

REGULAR RESERVE, UNDIVIDED EARNINGS AND RESERVES FOR

CONTINGENCIES

Obtain monthly activities of the regular reserve, undivided earnings and reserves for

contingencies accounts for the testing period and perform the following:

• Make a selection of monthly earnings transfers made by the CU and perform the

following:

• Compare the transfer to the Credit Union’s calculation of the amount to be

transferred.

• Test the mathematical accuracy of the computations in the Credit Union’s analysis.

• Compare amounts reported in the calculation to supporting general or subsidiary

ledger reports.

• Determine that the Credit Union’s computation is in compliance with applicable

regulation.

• Compare net income for the year to the related transfer to undivided earnings.

INVESTMENTS

Obtain a schedule or subsidiary ledger of investments by type and classification (HTM, AFS

or trading) from the CU which includes, by security, par value, cost basis, fair market value,

unrealized gains (losses), purchase date, maturity date and interest rate and perform the

following:

• Test the schedule for mathematical accuracy.

• Compare the total balance of investments and accrued interest receivable on the listing or

subsidiary ledger to the general ledger. If the amounts do not agree, obtain a CU prepared

reconciliation of the listing or subsidiary ledger to the general ledger, test its

mathematical accuracy and compare the amount reported as the subsidiary ledger balance

for both investments and accrued interest receivable to the subsidiary ledger and compare

the amount reported as the general ledger balance to the general ledger. Make a selection

of reconciling items and compare to [describe specific supporting documentation of

resolution.]

• Compare the total balance of unrealized gains and losses on securities designated as

available for sale to the related equity account.

• Make a selection of investments and compare the market value per the listing or

subsidiary ledger to an outside market value provided by the CU (of which such sources

may include broker advices, the Wall Street Journal, corporate credit union quotes etc.).

• Make a selection of securities and compare the accrued interest receivable balance to the

terms of the security (recalculate the amount of interest receivable in accordance with the

terms of the security). Also, recalculate the most recent interest coupon received and
MINIMUM PROCEDURES

APPENDIX A

App A-7

compare it to the credit entry on the general ledger account for accrued interest

receivable.

• Inquire if different individuals perform the following functions. Report which individuals

perform these functions.

1. Authorization of the purchase or sale

2. Accounting for investments (including general ledger and subsidiary ledger record

keeping)

• Observe that securities on hand are kept under dual control.

Obtain a listing of investment purchases during the testing period, make a selection and

perform the following:

• Compare the terms [define terms in policy] of the investment with CU investment policy,

and note terms that deviate from CU policy. [State in the report on minimum procedures

the terms that were compared.]

• Compare investment information to documentation of approval [when approval is

required by policy].

• Obtain the related broker advice and compare CU’s name, the par value, purchase price,

interest rate and maturity date to the listing or subsidiary ledger described in the

preceding procedure.

• Trace the purchases and sales to the minutes (of the appropriate committee).

For all investments purchased during the testing period (and still owned as of the testing date)

and for a selection of investments purchased in prior years, obtain written confirmation from

the safekeeper or custodian of the par value, interest rate and maturity date of investments

owned by the CU.

If the held to maturity (“HTM”) portfolio exceeds 10% of total assets at the testing date,

obtain a listing of HTM securities from the previous and current testing dates. Using the

listing from the previous testing date as a source, select those securities maturing beyond the

current testing date. For those items selected, compare those securities to the list as of the

current testing date (i.e., have not been sold or transferred).

SHARE ACCOUNTS

Reconciliation

Compare the balance of share accounts and accrued interest payable/dividends on the share

accounts subsidiary ledger to the general ledger. If the amounts do not agree, obtain a CU

prepared reconciliation of the share accounts subsidiary ledger to the general ledger and

1. Test the mathematical accuracy of the reconciliation,

2. Compare the amount reported as the subsidiary ledger balance for both share accounts

and accrued interest/dividends payable to the subsidiary ledger,

3. Compare the amount reported as the general ledger balance to the general ledger, and
MINIMUM PROCEDURES

APPENDIX A

App A-8

4. Make a selection of reconciling items and compare to [describe specific supporting

documentation of resolution.]

Note: The above procedures are to be performed as of the confirmation / verification

date, if applicable.

Overdrafts

As of a testing date, obtain a listing of negative share and share draft accounts. Include in the

report on minimum procedures each negative account balance that has been outstanding in

excess of ten days or in an amount in excess of the share draft policy.

Confirmation / Verification

Make a selection of share accounts for positive and / or negative confirmation / verification

[describe parameters/scope/date] and confirm the following directly with the member:

(Regulatory requirement for performance is every two years.)

• Current account balance

• Interest rate (if applicable)

• Maturity date (if applicable)

Note: Perform reconciliation procedures as of the confirmation/ verification date.

Accrued Interest Payable

Make a selection of share accounts from the current subsidiary ledger and compare the

amount of accrued interest payable or interest paid on the most recent payment date with the

terms of the share account (recalculate the interest amount in accordance with the terms of

the share account).
MINIMUM PROCEDURES

APPENDIX A

App A-9

OTHER ASSETS/LIABILITIES

Obtain a listing of suspense or clearing accounts, make a selection of those accounts and

perform the following procedures:

• Obtain reconciliations of selected accounts and compare the balance per the credit union

to the general ledger.

• Test the mathematical accuracy of the reconciliation.

• By reference to the date beside each reconciling item on the reconciliations, determine

whether any reconciling items originated in excess of ___ (number of days to be

established by the supervisory committee) days prior to the reconciliation date. Include

any such items in the minimum procedures report.

• For a selection of items, compare the disposition to supporting evidence (describe

evidence observed).

BOARD MINUTES

Obtain Board of Directors minutes for the testing period. Make a selection (number to be

determined by Supervisory Committee) of monthly meetings and determine that the

following activities were reported to or approved by the Board of Directors:

• Interest rate changes for loans

• Interest rates for share accounts

• Investment, Asset/Liability Management and Loan policies (annually)

• Delinquent loan reports

• Loan charge-offs
TRAVELERS CHECKS INVENTORY

Credit Union:

Name of Issuer: Audit date

G.L. Acct. No.: Count date

Serial Numbers Number of 

Checks Denomination Total Dollar 

Value

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

TOTAL $ amount counted: - $ 

Inventory summary:

Total amount counted: - $ 

Total per credit union log/records:

Difference: - $ 

I certify that the above listed travelers checks were counted by ______________________

for the supervisory committee on __________________ and they were returned to me intact. 

These are the travelers checks for which I am accountable. If there is any difference noted, I 

agree with this amount.

___________________________ ________________________________________

Employee signature Supervisory Committee Representative Signature
Appendix 8F -- CHANGE FUND RECAP FORM

Federal Credit Union

Change Fund Recap

Date of cash count:

Audit date:

 Difference

Teller no. Cash counted Change fund amt Over or (short)

Totals

Balance 

per G.L.

Difference

Compare total cash counted with the respective general ledger account

balance for the effective date of the count.

If there is a significant difference between the change fund counted and 

the general ledger balance, include this in your audit report.

File: chptr8.xls
INVESTMENT WORKPAPER

Available for Sale Investments

Description

Maturity 

Date

Purchase 

Date

General 

Ledger 

Balance [4]

Par Value Current 

Premium 

or 

Discount 

[4]

Adjusted 

Value

Market 

Value [4]

Unrealized 

Gain or 

(Loss) [5]

A

In

The following is an example of how your audit workpaper might look when completed:US AGENCY SECURITIES:

TOTALS

US GOVERNMENT OBLIGATIONS:

TOTALS
APPENDIX 10B -- TRIAL BALANCE OF INDIVIDUAL LOANS

Credit Union: Audit Date:

A. CURRENT BALANCES

TOTAL LOANS

General Ledger balance for total loans:

Sum of individual accounts from the Trial Balance(s):

 Potential adjustment/(write-off): [analyze below]

B. ANALYSIS OF DIFFERENCES - Previous 3 Months

From the Trial Balance(s):

From the General Ledger:

 Gain(Loss):

Describe actions by staff to correct differences shown in Sections A and B:
ALLOWANCE FOR LOAN LOSSES

Credit Union: Audit date

Transaction 

Month Charge-offs Recoveries

PLL

Adjustment

Misc. (DR)

and CR Balance Comments

 Begin at date of your last audit, record monthly through the current date:

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

Totals:

Balance of the A.L.L. (Account No. 719):

Difference:

Describe actions by staff to correct difference:
FIXED ASSETS WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. 

Number

Date 

Purchased Cost Description

Depreciation 

term

Reviewed

Invoice (Yes 

or No)

Date board 

approved

Observed

Asset (Yes or 

No)

File: chptr12a.xls
OTHER ASSET ACCOUNTS WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. 

No. Description of Asset G.L. Balance Tested Reconcilement

Completed 

Audit 

Procedures

Exception 

(Yes or No)

File: chptr13a.xls
OTHER LIABILITY ACCOUNTS WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. No. Description of 

Liability G.L. Balance Tested 

Reconcilement

Completed Audit 

Procedures

Exception 

(Yes or No)

File: chptr14.xls
TRIAL BALANCE OF INDIVIDUAL SHARES

Credit Union: Audit Date:

A. CURRENT BALANCES

TOTALSHARES

Sum of individual accounts from the Trial Balance(s):

General Ledger balance for total shares:

 Potential adjustment/(write-off): [analyze below]

B. ANALYSIS OF DIFFERENCES - Previous 3 Months

From the Trial Balance(s):

From the General Ledger:

 Gain(Loss):

Describe actions by staff to correct differences shown in Sections A and B:

File: chptr16.xls
REGULAR RESERVE TRANSFERS

Credit Union: Audit date

Completed by:

PERIOD ENDING: 

STATUTORY RESERVES:

Pre-Closing Regular Reserve

PLUS: Allowance for Loan Losses

LESS: Provision for Loan Losses Expense

ADJUSTED RESERVES: (A)

TOTAL ASSETS:

Assets per Balance Sheet

PLUS: Allowance for Loan Losses

GROSS ASSETS:

LESS: Non-Risk Assets:

Cash on Hand

Deposits at Insured Institutions < 5 yrs maturity 

Assets guaranteed by U.S. Govt. < 5 yrs maturity

Loans to other credit unions with < 5 yrs maturity

Insured student loans with < 5 yrs maturity

Loans insured by Fed/State Govt. < 5 yrs maturity

Shares in Corp. CUs with < 5yrs maturity

Common trust/mutual fund marked to market

Prepaid Expenses

Accrued interest on non-risk investments

Fully share secured loans

Loans guaranteed by NCUA

NCUSIF Deposit and Guaranty Accounts

Central Liquidity Fund Shares

Fixed Assets

Investment > 5yrs mat. (lower of cost or market)

TOTAL RISK ASSETS: (B)

RISK ASSET RATIO: (A divided by B) (C)

STOP HERE IF THE RATIO IS OVER 6% (NO TRANSFER REQUIRED)

PART A - Calculating the Risk Assets

File: chptr17.xls
PERIOD ENDING: 

GROSS INCOME 

LESS: Contributions

Non-operating Gain, if included above

Income from CLF Investments

ADJUSTED GROSS INCOME (AGI) (D)

(NOTE TO E&I -- need to set up formulas like in Aires to compute how much should be transferred at 5%/10%.

5% TRANSFER AMOUNT (E)

10% TRANSFER AMOUNT (F)

REQUIRED TRANSFER (E plus F) (G)

ACTUAL TRANSFER (H)

OVER/(SHORT) (H minus G) (I)

PERIOD ENDING: 

NET INCOME: (Credit to Undivided Earnings)

PLL Expense: (Credit to Undivided Earnings)

(Debit to Regular Reserves)

PART B - Calculating the Transfer Amount

PART C - Verifying Other Closing Entries

You should verify the other required closing entries affecting equity are properly recorded at the same time you are 

analyzing the reserve transfer activity. The typical closing entries are similar to the following workpaper. Note that 

negative conditions (a net loss instead of a gain, or reversal of a loss expense) would reverse the credits/debits for 

these examples.

File: chptr17.xls
APPENDIX 18A -- GROSS TEST: INTEREST ON LOANS

Credit Union: Audit 

Prepared By:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct No

APRs:

Total Loans: Recorded Interest:Earned Interest:

Difference:
APPENDIX 19B -- OPERATING EXPENSES WORKPAPER

Credit Union:

Completed by: Audit date

G.L. Acct. 

No. Description of Asset G.L. Balance

Completed 

Analytical 

Review

Completed 

Audit 

Procedures

Exception 

(Yes or No)

File: chptr19a.xls
APPENDIX 20B -- SCHEDULE OF EMPLOYEE AND OFFICIAL SHARE AND LOAN 

Credit Union: 

Completed by:

 Loan Data 

Name Position Account No. Share Balance Original Amount Current Balance Date of Loan Rate Collateral Term