California Code of Regulations › Title 10 - Investment › Chapter 3 - Commissioner of Financial Protection and Innovation › Subchapter 10 - Check Sellers, Bill Payers and Proraters › Article 3 - Books, Records and Examinations › Section 1787.1 - Preparation of Independent Audit Report

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
A check seller shall furnish an independent audit report
					 pursuant to the following instructions:
STATE OF CALIFORNIA DEPARTMENT OF BUSINESS
					 OVERSIGHT
INSTRUCTIONS FOR INDEPENDENT AUDIT PURSUANT TO THE
					 CALIFORNIA CHECK SELLERS, BILL PAYERS AND PRORATERS LAW
To Licensee and the Accountant:
These instructions have been prepared as an aid to
					 licensees and their independent accountants in the preparation of the audit
					 report to be filed with this Department pursuant to Section
					 12304 of the Check Sellers, Bill
					 Payers and Proraters Law (Law) (Financial Code, Division 3).
There are set forth in these instructions certain
					 requirements which must be included in the accountant's comments and certain
					 auditing procedures to be performed in the conduct of the audit in order that
					 the report be acceptable to the Department in accordance with Section
					 12304 and the proper
					 administration of that section. The requirements included herein are a part of
					 and/or
in addition
to generally accepted accounting principles
					 and auditing procedures applicable in the circumstances.
It will be noted that these requirements have been
					 developed by adapting generally accepted accounting principles and auditing
					 procedures so as to follow the express provisions of Section
					 12304 of the Law and these
					 rules.
These instructions set forth minimum audit procedures and
					 are not in any manner intended to restrict the judgment of the independent
					 public accountant where in his/her opinion the circumstances warrant the
					 employment of additional procedures.
The report may be filed with any office of the Department
					 of Business Oversight.
AUDIT REPORT AND PROCEDURES
Balance Sheet and Statement of Income:
These financial statements must in all cases be audited
					 statements prepared on an accrual basis accompanied by a short or long form
					 accountant's report, including an opinion meeting the standards of the
					 California Board of Accountancy with no material qualifications. (Rule 58 of
					 the Board of Accountancy.) The financial statements shall include a balance
					 sheet which must be as of the end of the licensee's fiscal year or in the case
					 of a closing audit report, shall be as of the date of expiration, surrender or
					 revocation of license, and a statement of income for the fiscal year or period
					 then ended.
The following items must be taken into consideration by the
					 accountant in examining the financial statements of a licensee under the Law
					 (other than a general prorater), when applicable to the particular business of
					 the licensee.
(a) If licensee is
				  engaged in other businesses, in addition to the licensed business, all assets
				  and liabilities of other businesses must be included in the balance sheet
				  submitted. All income and expenses of other businesses must be included in the
				  statement of income submitted.
(b)
				  The money order and bill collection liabilities at the balance sheet date,
				  should be shown as a deduction from the trust bank account on the asset side of
				  the balance sheet rather than showing the net amount, if any, in the trust bank
				  account.
(c) The accountant shall
				  enumerate in detail, in comments included in the report, the auditing
				  procedures employed in verifying the money order and bill collection liability.
				  The accountant's verification shall include observation of the preparation of
				  the individual outstanding money order (trust subsidiary ledger) tabulation and
				  sufficient test checks of this procedure to ascertain that the tabulation was
				  proper. The subsidiary ledger should be reconciled with the trust control
				  account. Shortages (excess of subsidiary over control) should be covered by the
				  licensee's deposit of general funds in the trust account. Overages (excess of
				  control over subsidiary) should be noted and carried forward to subsequent
				  tabulations.
The accountant's verification shall also include a
					 selective examination of the old outstanding money orders and the propriety of
					 the clearings against these dormant items. Permanent old outstanding audit
					 listings should be maintained by the accountant for this purpose. Dormant
					 outstanding items should be traced through the escheat date, and should not be
					 subjected to service charges or other fees.
An examination shall be made, on a test-check basis, of the
					 money orders issued and bill collections made prior to the last day of the
					 calendar or fiscal year under examination but which were outstanding on that
					 date and which cleared the trust account subsequent to the last day of the
					 calendar or fiscal year being examined. The purpose of the examination shall be
					 to determine that such money orders and bill collections have been included in
					 the money order and bill collection liability as at the end of the calendar
					 year or fiscal year under examination, and the test check shall be sufficient
					 to enable the accountant to make such determination.
The withdrawal by the licensee of money order or bill
					 collection fees should be reviewed for propriety. The collection and payment of
					 utility bills should be examined for timely remittances and proper
					 handling.
Precleared money orders (money orders which have cleared
					 the trust bank account but have not been reported and/or paid for by agents)
					 should be tested for a period before and after the balance sheet date and a
					 proper cut-off established. The validity of the preclears should be determined
					 by tracing of money orders clearing subsequent to the cut-off and by comparing
					 preclears with agent's reports processed after the cut-off date. Preclears
					 should be aged by dollar amount for each agent and considered in the
					 examination of agent's reporting practices-see item (e) below.
(d) The accountant shall include in the
				  report or in a separate letter over his/her signature, a brief description of
				  the system of internal control, its weaknesses, if any, and recommendations for
				  improvement, if any. Such report or letter may incorporate by reference all or
				  part of any previous report or letter to the Commissioner.
(e) In the event the licensee has agents, and
				  after a detailed review of preclears and a determination of which agents are
				  not complying with Section
				  12300.4 of the Law, the agents
				  comprising the top 25% of the non-complying group shall be concentrated on and
				  visits arranged to agency locations selected from among that group. Care should
				  be taken to note substantial violators not on the preclear list (i.e., agents
				  may submit reports without payment; these reports may be processed by the
				  licensee in which case the agent would not, appear on the preclear list in any
				  substantial amount). In these cases bank reconciliations and/or "due from"
				  agent accounts should be carefully examined. It should be noted that trust
				  funds consist only of cash or cash in transit from agents. Emphasis should be
				  placed on larger agents that could, in the event of a cash shortage,
				  financially impair the licensee. In visits to the agent's location, the
				  independent accountants' function will be to accompany licensee's personnel and
				  observe cash count and collection of amounts due for all money orders sold and
				  not reported. The accountant should verify the deposit of these trust funds
				  into the bank. The accountant should verify whether all cash shortages have
				  been covered by the licensee's deposit of general funds. There shall be
				  included in the report a schedule of those agents cash short and those agents
				  not complying with the three-day reporting requirement, and comments on action
				  taken by the licensee, if any, in connection therewith pursuant to Section
				  12301.4 of the Law.
Independent accounts shall assess the materiality of overall agent
				  reporting deficiencies that may be sanctioned or allowed by the licensee and
				  disclose improper reporting practices, especially of larger agents that could
				  financially impair the licensee. A statement to this effect shall be made in
				  the independent accountant's report.
(f) Include a statement to the effect that
				  the accountant has examined the books and records with respect to the
				  provisions of the Uniform Disposition of Unclaimed Property Law (Code of Civil
				  Procedure, Part 3, Title 10, Chapter 7), and the results of such
				  examination.
(g) If the liabilities
				  include long term notes or mortgages, state the amount of monthly payments,
				  name of payee, due date, and other terms and conditions, including any
				  subordination agreement which may exist with respect thereto in the financial
				  statements or a footnote thereto.
The following items should be taken into consideration by
					 the accountant in preparing the financial statements and comments of a general
					 prorater:
(a) If the licensee is
				  engaged in other businesses, in addition to the licensed business, all assets
				  and liabilities of other businesses must be included in the balance sheet
				  submitted. All income and expenses of other businesses should be included in
				  the statement of income and expenses submitted.
(b) The liability for clients' deposits not
				  yet transmitted to creditors should be shown as a deduction from the trust bank
				  account on the asset side of the balance sheet, rather than showing the net
				  amount, if any, in the trust bank account.
(c) The accountant shall enumerate in detail
				  in his/her comments, the auditing procedure employed in verifying the
				  untransmitted clients' funds.
(d)
				  The accountant shall include in the report or in a separate letter over his/her
				  signature, a brief description of the system of internal control, its
				  weaknesses, if any, and recommendations for improvement, if any. Such report or
				  letter may incorporate by reference all or part of any previous report or
				  letter to the Commissioner.
(e) In
				  the event licensee has branch offices, each office shall be examined to the
				  same extent as the main office.
(f)
				  If the liabilities include long term notes or mortgages, state the amount of
				  monthly payments, name of payee, due date, and other terms and conditions,
				  including any subordination agreement which may exist with respect thereto in
				  the financial statements or a footnote thereto.
1. New
					 section filed 12-12-55 and amendment filed 12-21-55, as emergencies; effective
					 upon filing (Register 55, No. 18).
2. Amendment filed 12-31-58;
					 effective thirtieth day thereafter (Register 59, No. 11).
3.
					 Amendment filed 12-16-68; effective thirtieth day thereafter (Register 68, No.
					 48).
4. Amendment filed 8-9-83; effective thirtieth day thereafter
					 (Register 83, No. 33).
5. Change without regulatory effect amending
					 first paragraph, Instructions heading, first and last paragraphs of
					 Instructions, and third paragraph of subsection (c) of Audit Report and
					 Procedures filed 1-3-92 pursuant to section
					 100, title 1, California Code of
					 Regulations (Register 92, No. 12).
6. Change without regulatory
					 effect amending first and last paragraphs of Instructions and first
					 subparagraph (f) filed 6-26-96 pursuant to section
					 100, title 1, California Code of
					 Regulations (Register 96, No. 26).
7. Change without regulatory
					 effect amending title of instructions and fifth paragraph of instructions filed
					 8-13-2014 pursuant to section
					 100, title 1, California Code of
					 Regulations (Register 2014, No. 33).
Note: Authority cited: Section
						12300,
						Financial Code. Reference: Sections
						12300.4,
						12301.4 and
						12304,
						Financial Code.