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Section A General

Audit Program

1. Review current risk assessment documents prepared by bank

employees and the internal audit department, as well as documentation
for the Federal Deposit Insurance Corporation Improvement Act

Compare the documents relative to risks and controls identified.

Verify that FDICIA controls are assigned to appropriate
individuals within the department.
Ensure the FDICIA matrix agrees to the audit program; update
as necessary.
Ensure all required FDICIA-related testing is completed.
At the commencement of the audit, perform an updated risk
assessment. Conclude as to the appropriate audit frequency and
scope, and update the audit department's risk assessment

2. Review the most current regulator reports to identify issues noted.

Incorporate concerns into the audit as appropriate.

Section B - Account Reconciliations

Audit Objectives

Determine that reconciliations are properly completed on a recurring basis for

all balance sheet accounts and internal demand deposit accounts (DDA) that
are the responsibility of the commercial loan department.

Audit Program

1. Select asset accounts more than $100,000, and all liability accounts
and internal DDAs that are reconciled by the commercial loan

Determine that the proper reconciliation format was used and all
account reconciliation standards were adhered to.
Foot the reconcilements on a test basis.
Trace totals to the general ledger and subsidiary ledgers as
Verify that adequate supporting documentation exists and each
reconciling item is listed with an initial entry date.
Verify that the reconcilement is signed and dated by the preparer
and a reviewer.
Determine that unreconciled accounts, unsubstantiated reconciling
items, and items more than 90 days old were communicated to
2. From the remaining accounts not already tested, select all general
ledger suspense accounts and "in process" accounts.

Test reconcilements in accordance with the attributes described in

No. 1 above.
Age all items that make up the account balance and determine the
reason for any items over ______ days old.

Suspense Account: An account used to post items temporarily, pending

decision of final treatment.

3. Review the most current FDICIA document and determine if it contains

the necessary financial accounting controls to comply with FDICIA

Section C - Documentation Review

Audit Objectives

Determine that loan documentation is adequate and in compliance

with the credit policy and regulatory requirements.
Determine that loan information is properly recorded on the
subsidiary records.
Determine compliance with the Real Estate Appraisal Act and bank

Audit Program

1. Request a system audit report that provides a stratification of loans

within the audit period by account status code to determine the
population and sample size. Select a representative sample of
loans originated since the prior audit and document the sample
selection. NOTE: Do not include commitments or letters of credit that
have not been drawn on.

2. For each loan selected, note the purpose of the loan, the approved
underwriting documents, the credit and financial information, and the
loan agreement and perfected lien information, such as:

Financing statement.
Pledge and hypothecation.
Uniform commercial code filed with state and county.
If cash collateral, note if there is a hold on the account.
Title insurance.

3. Determine that there is an agreement to provide insurance signed by

the borrower and if applicable, proof of hazard insurance or other
applicable collateral insurance. The documentation should include the
physical description of the insured property. The policy should cover the
loan amount and list the bank as loss payee.

4. Determine that the account officer has completed the environmental

checklist. If the preliminary screening is waived, the exception must be
noted on the commercial loan input sheet.
Determine that the Phase I, II, or III environmental report is
completed, if applicable, with documented evidence of managerial

5. Review the adequacy of the collateral description and valuation;

document on the audit spreadsheet.

6. Review for a written appraisal performed by a bank approved appraiser,

if applicable, and determine that the valuation is more than the loan
amount on the date of valuation. Ensure a copy of the completed
appraisal review checklist was signed and dated in ink by the reviewer.

7. Verify flood determination and insurance, if applicable.

8. Review the note for proper completion, ensuring it is signed by the

borrower(s) and includes the loan amount, interest rate, and maturity

9. Review the corporate resolution or partnership agreement, if applicable.

10. Determine that there is a completed loan checklist or document

transmittal sheet.

11. Agree information from the loan documents to the system report to
ensure proper entry to the system.

12. Determine that exceptions were identified in the post-closing review

performed in the credit department.

Section D - Past Due Loans

Audit Objectives

Determine that management's policies and procedures are followed for

delinquent accounts.
Determine non-accrual policy and procedures are followed.

Audit Program

1. Document the procedures followed to compile month-end delinquency

and non-accrual figures for reporting to the affiliate board of directors.
Ensure procedures include:

Monthly review of delinquencies and non-accruals by management.

Minimal, or no, adjustments to the system delinquency and non-
accrual figures.
Appropriate approval for placement of a loan on non-accrual, and
reversal of non-accrual status.

2. Obtain the following delinquency and non-accrual reports submitted to

the board as of the audit date:

Business loans.
Credit lines.
Personal loans.
Real estate loans.

3. Ensure all loans reported as delinquent/non-accrual per the mainframe

reports were included in the board reports in the proper
delinquency/non-accrual category. This can be done in total. Loan-by-
loan tracing may be required if exceptions are noted.

4. Review all system booked non-accrual loans.

Determine that all related accrued interest has been reversed from
income in accordance with policy.
Agree control totals to management's report of non-accrual loans.
Obtain the accrued interest summary report and reconcile the total
to the general ledger accrued interest commercial loans account.

5. Determine the existence of loans not tracked on the mainframe (e.g.

participations) and ensure associated delinquencies have been properly

Section E - Adjustable Rate Loans

Audit Objective

Ensure interest rate changes are recorded correctly as to account,

amount, and period.

Audit Program

1. Determine and document whether all business loans are automatically

or manually adjusted.

2. For loans that are manually adjusted, review and document rate change
procedures and determine if segregation of duties is adequate.

3. Obtain the latest production report listing of adjustable rate loans by

adjustment date and determine that the loans are being reported to
management each month and that exceptions are cleared timely.

4. Review a sample of various loan types from the system report of

"sample of adjustable rate loans" to ascertain:

Rates have been changed per terms of the note/agreement.

Rate adjustment is calculated correctly.
The customer was notified.
A record of change is maintained.

Section F - Real Estate Appraisal Act

Audit Objective

To determine that real estate appraisals are obtained as required by

Title XI of the Federal Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), the minimum standards set forth
by regulatory guidelines, and bank policy.

Audit Program

1. Document the process to select appraisers to perform commercial

appraisals and evaluations for the bank.

Ensure the selection process is nonpreferential and unbiased; the

appraiser is independent and has no direct or indirect interest in the
property or transaction; and the appraiser is properly qualified and
capable of providing an unbiased opinion.
Determine if procedures exist (i.e., tickler system) to alert
management that the applicable appraiser's license has or is about
to expire.

2. Obtain the bank's approved appraiser listing. Select a sample of

________ loans from each category and perform the following:

Determine that the appraisal/evaluation was performed by a

certified appraiser approved by the bank.
Determine that the request for appraisal or evaluation form was
properly completed.
Ensure a compliance review of the appraisal/evaluation was
performed, which should include a written analysis that addresses
the appraiser's assumptions, conclusions, and valuation.
Verify re-appraisals have been performed in accordance with policy.
(NOTE: An updated appraisal is currently not acceptable as an
appraisal under FIRREA, but may be acceptable as an evaluation.)

Section G - Letters of Credit

Audit Objectives

Determine that letters of credit are properly approved and documented.

Determine that fees charged by the bank are properly recorded and in
conformance with bank policy.

Audit Program

1. Review all policies related to letters of credit (LOCs). Determine the

impact of policy changes on the implementation of new policies since
the previous audit date.

2. Obtain the monthly LOC report for the period under audit from
commercial loan administration.

3. Select a sample of LOCs and document sample selection (i.e.,

population and sample sizes, method of selection, time period).

4. For the sample selected, perform the following:

Document the customer name, LOC amount, LOC number,

issuance date, and expiration date.
Verify that the LOC was properly approved.
Examine the LOC agreement for proper signatures.
If the LOC is supported by a commercial note/demand note,
examine the note for customer name, amount, and proper
signatures. NOTE: The note represents the note receivable that will
materialize if the letter of credit is funded.
If the LOC is secured, examine the documents applicable to each
type of security.
Document amount of fees charged by the bank and the date
received. Verify that fees charged appear reasonable based on
bank policy.
Trace the fees to the general ledger. Verify that the fees are
recorded in the proper period and that there are no unusual time

5. Obtain the LOC system report and reconcile to management's LOC

listing, noting any discrepancies.

6. Document how management tracks and records commitments that are

ultimately reported on the call report.

Section H - Floor Plans

Audit Objective

Determine that floor plan loans are properly approved, recorded, and
supported by notes and other necessary documents.
Determine that assets actually exist and are adequately protected from
misuse, destruction, or misappropriation.

Audit Program

1. Document floor plan inspection procedures and comment on their


2. Obtain a system audit report of floor plan loans and select new loans
since the last audit date and perform the following:

Review for approval of existing credit line, name, balance

outstanding and credit line limits.
Examine floor plan agreements.
Examine corporate resolution, if applicable.
Examine security: title and certificate of origin.
Examine application and approval of credit line.
Determine if covenants are met, (i.e., current financial statements
and reductions.)
Determine the requirements for curtailment of principal is in
conformance with bank policy.

3. Obtain several months recent floor plan inspection reports and review
each for:

Compliance with frequency of bank policy.

Follow up on units that are unaccounted.
Proper completion of forms (e.g., signed, dated, units listed,
mileage shown.)

Section I - Management Reports

Audit Objectives

Determine that management reports are prepared in a timely manner

on a regular basis and are appropriately reviewed by management.

Verify the accuracy of management reports.

Audit Program

1. Document the reports used by management in monitoring the loan

portfolio. (e.g., Loans to affiliates, insider loans, expired risk ratings,
frozen letter of credit, exception reports.) Identify which reports are
prepared for senior management and how often they are prepared.

2. Test a sample of the reports and ensure they were reviewed by

departmental management and that appropriate follow up actions have
taken place. NOTE: Concentrate testing on reports/areas that appear to
have an excessive number of expired items or exceptions.

3. Determine and document the process by which the credit area performs
the post-closing loan documentation review function. Include the
following information:

Determine the scope of review, including types of exceptions and

loan amounts reviewed.
Determine the process used in removing items from the
documentation exception list.
Document the process in controlling documents sent from other
areas to ensure they are received, documented, and the exception
were removed from the exception report timely.

4. Select a sample of ________ items removed from the loan

documentation exception listing:

Document the date the documentation was received by the credit

administration department requesting that the documentation
exception be removed.
Determine if the exception was removed from the documentation
exception listing timely.
Determine if the supporting documentation was filed in the credit
administration department.

5. Obtain the expired insurance system report. Determine the adequacy of

review and follow up procedures for expired insurance policies.

Section J - Account Maintenance Function

Audit Objective

Evaluate the adequacy of controls over changes to account records.

Audit Program

1. Determine and document the process for performing subsequent

account maintenance on loans within the business loan application.
Include the following information:

Identify the individuals responsible for keying the maintenance to

the system.
Ensure procedures include a documented edit of the change.
Determine what source documents are used to input maintenance

2. From the business loan application, obtain the security activity journal
and select a sample of days within the audit period and test a sample
of _____ maintenance changes.

Determine that documented approval for the change was obtained.

Determine that the change was performed correctly.
Determine that all necessary signatures were obtained (i.e.,
individual requesting the change, individual inputting the change,
individual approving the change, and the individual performing an
edit of the change.)

3. From the change request forms select a sample of maintenance

changes performed and test the following:

Determine the documented approval for the change was obtained.

Determine that the change was performed correctly.
Determine that all necessary signatures were obtained (i.e.
individual requesting, inputting, approving, and performing an edit
of the change).

Section K - Inhouse Lending Limits

Audit Objective

To determine that a monitoring process exists in determining

adherence to the bank's house lending limits.

Audit Program

1. Determine and document how management monitors adherence to the

bank's house lending limits at loan origination.

2. Determine and document how management reviews overdrafts and

subsequent adherence to the bank's house lending limit. (Overdrafts
are considered an extension of credit thus must be included in the
outstandings to the individual borrower.)

3. Obtain a list of the bank's largest aggregate customer relationships.

Select a sample of ____ customers and determine through account
inquiry screens if they have had frequent or significant overdrafts.

4. Determine if the overdraft for that day caused the individual borrowers
outstandings to exceed the inhouse lending limit.

Section L - Allowance for Loan Losses

NOTE: The nature and scope of the audit procedures performed in this section
are not designed to draw a conclusion concerning the adequacy of the
allowance for loan losses, but rather to test the input used in the allowance for
loan loss calculations. The focus is to determine if management has
established appropriate policies and procedures for evaluating the adequacy of
the allowance and has properly implemented those procedures as necessary to
ensure that adequate reserves for projected and unknown credit losses are

Audit Objectives

Determine that the allowance for loan losses is being evaluated on a

regular basis.
Determine that charge-offs have been properly approved and

Audit Program
1. Obtain all supporting workpapers and documentation used to prepare
the analysis of the adequacy of the allowance for loan losses as of the
audit date. Indicate in the workpapers how often the analysis is

2. On a test basis, verify the accuracy of the information used to compile

the workpapers by tracing data to supporting documentation, such as
loan ledgers, problem loan reports, and prior allowance workpapers.
Foot and crossfoot extensions on the workpapers.

3. Include in the workpapers an allowance for loan loss analysis

worksheet documenting the test of balances to the general ledger
and/or supporting documentation; reserve ratios to supporting
documentation such as historical loan loss worksheets; and recompute
the reserve amount on a sample basis.

4. On a test basis, verify the accuracy of the allowance information

reported to the board of directors by tracing information from
supporting workpapers to the board minutes.

5. For one test month, trace the entries for charge-offs and recoveries to
the detail documentation.

6. For our test month selected above, determine that charge-offs have
been properly approved and are in conformance with the company's

7. Test trace charge-offs to clearance in the general ledger to ascertain

that the entry was properly recorded.

Section M - Participation Loans

Participations Purchased

Audit Objectives

Determine that participations purchased are properly recorded and

supported by necessary documentation.
Determine that loans were properly approved and coded on the

Audit Program

1. Obtain a system audit report of participation loans purchased since last

audit date. List loans by account number and name, original balance,
current balance, interest rate, principal, percent owned and
participating banks and their percent owned.

2. Verify that the loan participation agreement was properly approved by

bank officials and provides for a transfer of all the seller's rights under
the loan agreement. These interests include payments collected,
proceeds from the disposition of the collateral, and insurance

3. Verify that the loan participation agreement provides for a participation

interest in the collateral securing the loan.

4. Balance the system audit report of participation loans to the schedule

of purchased loans maintained by management.
5. For all participation loans, obtain the month-end reconcilement to the
general ledger and review the following for accuracy:

Trace the balance from the reconcilement to the curtailment or

remittance report.
Verify that current property insurance is in force on the participation
Verify there are current financial statements in the file.

6. Select a sample of participation loans sold during audit period.

Document the sample selection and trace to the schedule of sold loans
obtained from the bank.

7. Balance the system audit report of participation loans to the schedule

of sold loans obtained from the bank.

Section N - Unissued Checks

Audit Objective

Determine controls over maintaining and issuing negotiable

instruments are adequate.

Audit Program

NOTE: Paid-no-issue items may be monitored centrally and should be audited

in the accounting audit.

1. Identify all users within the department and obtain the supporting
documentation for their most recently completed official check

2. Review the inventory for propriety.

3. Ensure the department is maintaining the issue copies of checks in

numerical order.

4. Review recent issue copies of checks and opened packs of unissued

checks to ensure no checks are missing.

5. Ensure the working supply of checks is kept to a minimum.

6. Ensure the unissued supply of checks is maintained under limited

access during banking hours and properly secured during nonbanking

7. Ensure authorized signers do not also maintain the key to access

unissued checks unless compensating controls are in place.

8. Reconcile from the last inventory performed to inventory on hand as

of the test date by performing the following:

Perform an inventory of all unissued checks on hand.

Obtain the last inventory performed.

Account for all checks issued since the last inventory by

reviewing copies of checks issued which are maintained by the

Evaluate the adequacy of the destruction process.

Section O - System Access

Audit Objective

Determine access levels assigned are appropriate and periodically

reviewed in accordance with bank policy.

Audit Program

1. Determine system access levels were reviewed annually in

accordance with procedures.

2. Obtain and review the security by function report and a sample of

individual profiles for appropriateness. Ensure that individuals
assigned loan adjustment access are still employed and working
within the department.

3. Determine if access level given appears commensurate with the job


Section P - Audit Query Reports

Audit Objective

Determine transactions are properly processes and exception

conditions timely resolved.

Audit Program

1. Request a system audit report of closed loans with accrued interest

remaining. Investigate any accounts with a balance or accrued
interest remaining with management.

2. For questionable loan rates appearing on the commercial loans

report, review the file for proper rate approval, floor and ceiling rate if
tied to base or deposit rate, and employee discounts.

3. Using a system report of commercial loans with expired maturity

dates for nondemand loans, determine if loan is still open, current, or
delinquent. Note any loans with maturity dates > 60 days past
maturity date. NOTE: Demand loans do not have a maturity date.

4. For loans listed on the system report of commercial loans with current
balance > loan amount, determine that overdraws have been properly

5. Obtain a system report of current loan amounts > original loan

amount. Select a sample and review to ensure the increase in loan
amount was properly approved.

6. Using the system report of unadvanced loans, determine that

appropriate follow-up procedures are performed and loans are
advanced timely.

Section Q - Loan Fees

Audit Objective

Determine that loan fees are properly monitored.

Audit Program
1. Identify the process used to monitor loan fee income. Document the
individuals responsible for monitoring loan fees, the process for
determining the loan fees on a loan-to-loan basis, the general ledger
accounts used during the monitoring process, and the journal entries to
record loan fees.

2. Perform an analytical review of year-to-date loan fees in comparison

to the prior year.

3. Review income account detail. Test large debits to the accounts.

Section R - Loan Advances

Audit Objective

Ensure loan advances are processed, monitored, and reported in

accordance with established policies and procedures.

Audit Program
1. Obtain the loan advance disbursement policies and procedures.

2. Evaluate and document the loan advance monitoring process.

3. Obtain a sample of reports that are used in the monitoring

process. Determine that:

The required documentation is obtained.

Follow up is performed timely and all items are adequately
Items that are not in compliance with the existing procedures
are reported to an appropriate level of management.
Proper authorization is documented for advances.

Section S - Tickler System

Audit Objective

Determine that tickler systems are being currently and properly


Audit Program

1. Determine the types of data tracked by ticklers (i.e. hazard

insurance, flood insurance, and loan docs) and that procedures are
in place to ensure loans are properly included on the tickler file

2. Review the current tickler file and determine if the tickler is worked
on a current basis. Pay particular attention as to whether flood
insurance items are current.

3. Verify the accuracy of the tickler. Select a sample of ______ items

and trace to loan files and ensure the loans are properly included on
the tickler.

Section T - Stock Secured Loans

Audit Objective

Determine that the bank is in compliance with Regulation U and bank


Audit Program

1. Review all policies related to stock secured loans. Determine the

impact of policy changes or the implementation of new policies since
the previous audit.

2. Obtain a system audit report of loans secured by stocks and bonds.

3. Select a sample of ______ loans from the report obtained in step 2

above and determine that:
A lost or stolen inquiry form was obtained.
A pledge/hypothecation agreement was obtained.
A stock/bond power was obtained.
A collateral receipt was obtained.
U-1 was properly completed, if applicable.
The value of the collateral is repriced quarterly in compliance
with policy.
The margin requirements are in compliance with policy.
A documentation checklist was used.

4. Reconcile the system report obtained in step No. 2 to management's

listing of stock secured loans. Note any discrepancies.

5. Determine that at least twice per year, credit administration reprices

stock held for collateral at the branches in accordance with bank
policy and procedures.