This appendix presents minimum procedures which a supervisory committee, its internal auditor, or other qualified person must complete when a credit union chooses the Other Supervisory Committee Audit option for completing its annual audit requirements under §715.7.

This option may not be adequate for all credit unions as it is designed for smaller, less complex credit unions. The supervisory committee, internal auditor, or other qualified person 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 audit requirements in this part. The supervisory committee remains responsible to ensure that a complete set of test procedures is performed. All test procedures will be done using balances and samples for the applicable audit period under review.

Any time the test or confirmation procedures include making a sample or selection, the supervisory committee's report, its internal auditor's report, or other qualified person's report on minimum procedures should describe the method of selection and the number of selected items.

For purposes of this appendix, the following definitions will apply:

•  Confirm or confirmation refers to a written verification with a third-party (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.

•  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. Materiality should take into account ending balances as well as the volume of transactions in an account. Typically, balances or transaction volume greater than 5 percent of the credit union's net worth should be considered material for purposes of this appendix.

•  Review refers to the examination of Board minutes, policies and procedures, and a review of a sample portion of activities, rather than all of the activities.

•  Test refers to 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.

The supervisory committee, internal auditor, or other qualified person must perform and document the following minimum procedures:

•  Review Board of Director minutes to determine whether there are any material changes to the credit union's activities or condition that are relevant to the areas to be reviewed in the audit

•  Test and confirm material asset and liability accounts including, at a minimum:

o  Loans

o  Cash on deposit

o  Investments

o  Shares

o  Borrowings

•  Test material equity, income, and expense accounts

•  Test for unrecorded liabilities

•  Review key internal controls including, at a minimum:

o  Bank reconciliation procedures

o  Cash controls

o  Dormant account controls

o  Wire and ACH transfer controls

o  Loan approval and disbursement procedures

o  Controls over accounts of employees and officials

o  Other real estate owned

o  Foreclosed and repossessed assets

•  Test the mathematical accuracy of the allowance for loan and lease loss account and ensure the methodology is properly applied

•  Test loan delinquency and charge-offs

[84 FR 53308, Oct. 7, 2019]