California Code of Regulations › Title 10 - Investment › Chapter 3 - Commissioner of Financial Protection and Innovation › Subchapter 9 - Escrow Agents › Article 4 - Books, Records and Accounts › Section 1741.5 - Preparation of Independent Audit Report

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) Set forth below are the Instructions for
				  preparing the Independent Annual Audit Report required by Section
				  17406 of the Escrow Law.
STATE OF CALIFORNIA DEPARTMENT OF CORPORATIONS
					 INSTRUCTIONS FOR INDEPENDENT AUDIT PURSUANT TO THE CALIFORNIA ESCROW
					 LAW
(1) The Independent Annual
				  Audit Report shall be prepared in accordance with the provisions of Section
				  17406 of the Escrow Law, and as
				  provided in the paragraphs of this subsection. For the purpose of determining
				  independence, the regulations of the California State Board of Accountancy
				  (Chapter 1, Sections
				  1 through
				  99.1, Title 16, California Code of
				  Regulations) shall apply.
(2) The
				  following items shall be considered in preparation of the report and in
				  examining the financial statements included in the annual report:
(A) If the licensee is engaged in other
				  businesses, in addition to the escrow business, the financial statements of the
				  licensee shall include the assets and liabilities employed in such other
				  businesses and the results of the operations thereof.
(B) The income statement shall state,
				  separately from other salaries, the amount of salaries and bonuses paid to
				  officers.
(C) If the liabilities
				  include long term notes or mortgages, 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, shall be stated.
(D) Quoted market values, if available, shall
				  be stated parenthetically on the balance sheet or in a supporting schedule for
				  items as marketable securities, including obligations of the United States
				  Government, bonds of state and municipal governmental units, etc. A schedule of
				  all securities shall be included in the annual report.
(E) The report shall contain a statement as
				  to whether or not the licensee met the liquid asset and tangible net worth
				  requirement of Section
				  17210 of
				  the Financial Code on the balance sheet date. The report shall include:
(i) A schedule showing the computation of
				  both the licensee's liquidity and tangible net worth for measuring compliance
				  with Section
				  17210 of
				  the Financial Code.
(ii) An
				  itemized schedule listing each item included in the computations.
(iii) If marketable investments are included
				  as liquid assets, the following information must be shown: company name; market
				  value at balance sheet date; cost; the name of the exchange it is listed on;
				  and the stock symbol.
(iv) If fees
				  receivable are to be considered a liquid asset, a copy of the fee ledger at the
				  balance sheet date must be included with the report.
(F) The report shall include copies of the
				  trust bank account reconciliations for each location as of the balance sheet
				  date, including all interest bearing and dormant accounts. The report shall
				  contain an outstanding checklist which includes check and escrow numbers, dates
				  and amounts for each check and an explanation for all adjustments and
				  reconciling items including the date of adjustment. This explanation shall
				  include an affirmative statement if any reconciling items were not adjusted as
				  of the report date and whether or not the adjustments cause debit balances
				  (shortages). The outstanding checklists submitted with the audit report shall
				  be maintained in the confidential section of the Department of Corporations'
				  records.
(G) The report shall
				  include an escrow trial balance as at the reconciliation date.
(H) The report shall disclose if the licensee
				  is engaged in the business of receiving escrows for deposit or delivery of the
				  types of transactions specified in subdivision (c) of Section
				  17312 of
				  the Financial Code and if the licensee is engaged in the business of receiving
				  escrows for deposit or delivery of the types of transactions not specified
				  therein, or both. If applicable, the report shall include:
(i) A trial balance for the types of
				  transactions specified in subdivision (c) of Section
				  17312 of
				  the Financial Code and a separate trial balance for the types of transactions
				  not specified therein. The trial balances submitted with the audit report shall
				  be maintained in the confidential section of the Department of Corporations'
				  records.
(ii) A statement whether
				  or not escrow books and escrow trust accounts are maintained for those
				  transactions specified in subdivision (c) of Section
				  17312 of
				  the Financial Code separate from those transactions not specified
				  therein.
(iii) If the escrow agent
				  is engaged in the business of receiving escrows for deposit or delivery of the
				  types of transactions not specified in subdivision (c) of Section
				  17312 of
				  the Financial Code, a statement shall be made whether or not the licensee has
				  fidelity bond coverage as required by Section
				  1723 of these rules.
(iv) If the escrow agent is engaged in the
				  business of receiving escrows for deposit or delivery of the types of
				  transactions specified in subdivision (c) of Section
				  17312 of
				  the Financial Code, a statement shall be made whether or not the licensee is a
				  member of Escrow Agents' Fidelity Corporation as required by Section
				  17312 of
				  the Financial Code.
(3) The report shall include a statement
				  indicating:
(A) That the individual escrow
				  liability accounts and the controlling account have been reconciled to the
				  escrow trust account as at the balance sheet date. If debit balances exist in
				  the escrow liability, a full explanation of the nature and cause of the debit
				  balances must be included in the auditor's comments along with a full
				  explanation of the resolution of the item. If the debit balance has not been
				  resolved as of the date of the auditor's report, then the auditor shall include
				  a positive statement stating that the debit balance has not been resolved as of
				  the auditor's report date. If no debit balances were in existence at the
				  balance sheet date, a positive statement of this fact shall be made;
				  and
(B) That the escrow funds were
				  independently confirmed in writing by the accountant directly with the
				  depositories or other holders of escrow assets.
(4)
(A) The
				  schedule of the escrow liability as at the end of each month during the
				  calendar or fiscal year as reflected in the Escrow Control Account must be
				  included in the report.
(B) If the
				  audit is commenced on a date other than the calendar or fiscal year-end, the
				  accountant shall request cut-off bank statements on all bank accounts covering
				  the period from the balance sheet date to the date the audit is commenced. The
				  bank accounts shall be reconciled to adjusted book balances as at the cut-off
				  date, with particular attention given to the propriety and disposition of
				  reconciling items appearing in the bank reconciliations at the balance sheet
				  date. The report shall include and show the same information as at the cut-off
				  date as is required by paragraph (4) of this subsection.
(5) The opinion or report of the independent
				  accountant shall include a statement to the effect that the accountant has
				  examined the financial statements with respect to the provisions of Part 3,
				  Title 10, of the Code of Civil Procedure, and the results of such
				  examination.
(6) The accountant
				  shall use such additional auditing procedures and standards including extension
				  of the minimum escrow liability confirmation required above that is considered
				  necessary in verifying the escrow funds and the escrow liability. The escrow
				  liability shall include all escrow funds deposited into interest-bearing
				  accounts pursuant to Section
				  1737(b). The
				  comments shall include details of the nature and extent of all additional
				  auditing procedures used in this verification.
(7) The following additional audit procedures
				  shall be performed and the results shall be disclosed in the report:
(A) Verify the authorization and
				  documentation of disbursements from a selective number of escrows.
(B) Select a representative sampling of
				  escrows closed within 60 days prior to the commencement of the audit and
				  perform the following audit procedures:
(i)
				  Review escrow instructions, correspondence and documents in the escrow files
				  for authorization disbursements.
(ii) Review checks for disbursements out of
				  escrow.
(C) Review the
				  schedule of escrow liability as of the last audit for dormant files and
				  outstanding checks and perform the following audit procedures:
(i) Verify that funds in dormant files that
				  no longer are on the schedule of escrow liability were properly disbursed
				  according to signed instructions or according to the instructions of a court of
				  competent jurisdiction, were interpleaded to a court of competent jurisdiction,
				  or were escheated to the State of California.
(ii) Verify that the oldest dormant
				  outstanding checks that no longer appear on the outstanding checklist were
				  paid, were properly canceled back into the escrow fund, were properly canceled
				  and re-issued to the original payee, were properly canceled and re-issued to a
				  new payee according to instructions, or were escheated to the State of
				  California. The selection of the checks shall include those checks that were
				  older than six months at the last audit and no longer appear on the current
				  outstanding checklist. The procedures shall include the review of check
				  endorsements.
(8) When a licensee has branches, a statement
				  shall be made by the accountant that the examination included auditing of the
				  branches, and the address of each branch so examined shall be listed.
(9) If in the opinion of the independent
				  public accountant a departure from the requirements set forth in this section
				  is justified, upon request, the Commissioner may grant a variance upon a proper
				  showing of suitable alternative procedures.