G EN ERA L LEDGER - NCUA

Chapter 8

GENERA.L LEDGER

TABLE OF CONTENTS

GENERAL LEDGER ...................................................................................................... 8. 1

Examination Objectives....................................................................................... 8.1

Associated Risks .................................................................................................. 8-1

Overview.............................................................................................................. 8.2

Expanded Review Procedures.............................................................................. 8-3

Red Flags ................................................................................................. 8-4

Out-of-Balance Conditions ...................................................................... 8.4

Materiality................................................................................................ 8.4

Exami.nUatni.ounsuPaelrAiocdtiAvictyti.v..i...t.y.................................................................................................................................................................

8-5 8.5

NCUA 5300 ............................................................................................. 8-5

Accounts Receivable................................................................................ 8-5

CLF Stock/NCUSIFDeposit ................................................................... 8.6

Prepaid and Deferred Expenses ............................................................... 8-6

Fixed Assets ............................................................................................. 8-6

Capital Leases .......................................................................................... 8-7

Real Estate Sales...................................................................................... 8-8

Accrual Income ........................................................................................ 8.8

Other Assets ............................................................................................. 8-9

Accounts Payable ..................................................................................... 8-9

NDoi.vtei.dsePnadysaPbaley.a..b..l.e.........................................................................................................................................................................

8-9 8-9

Interest Refunds Payable.......................................................................... 8. 10

Taxes Payable .......................................................................................... 8. 10

Accrued Expenses.................................................................................... 8-10

Other Liabilities ....................................................................................... 8-11

Unapplied Data Processing Exceptions ................................................... 8-11

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8. 11 8. 12

Individual Share and Loan Ledgers ......................................................... 8-13

Ledgers Out Of Balance ........................................................................... 8-13

Arbitrary Adjustments.............................................................................. 8. 14

Pension Plans ........................................................................................... 8-15

Accounting for Pension Cost ................................................................... 8. 16

Workpapers and References................................................................................. 8. 17

Chapter 8

GENERAL LEDGER

Examination Objectives

Evaluate adequacy of policies, practices, procedures, and internal controls regarding financial transactions a Determine that personnel operate in conformance with established guidelines a Determine that the credit union properly recognizes and promptly records assets and liabilities a Review compliance with the FCU Act, NCUA Rules and Regulations, and appropriate accounting practices a Determine accuracy of the Financial and Statistical Reports (NCUA 5300) a Assess promptness of corrective action initiated by management when deficiencies or violations in policies, practices, procedures, or internal controls regarding financial transactions arise

Associated Risks

a Strategic risk. The timely, accurate and consistent recording of financial transactions affects management's development and monitoring of the strategic plan. Deficiencies in financial statement presentation may lead to ineffective evaluation of new products and services, and failure to attain financial objectives.

a Transaction risk. Policies and procedures established by the board and implemented by management should ensure the accuracy and integrity of data and information. In conjunction with the review of internal controls, examiners should consider the following items when evaluating this type of risk:

- The recording of financial transactions in accordance with

appropriate accounting methods;

- The volume and complexity of financial transactions; and

- The expertise and willingness of management to implement corrections for improving financial reporting.

a Compliance risk. Credit unions must comply with applicable laws and regulations, including:

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EXAMINER'S GUIDE

- The FCUAct; - NCUA Rules and Regulations; and - Regulatory accounting procedures, accounting bulletins, etc.

Additionally, they should be guided by

- The Accounting Manualfor Federal Credit Unions (for credit

unions that are less complex); and/or

- Generally accepted accounting principles (GAAP.)

0 Reputation risk. Examiners should consider reputation risk when developing the Scope Workbook. When evaluating reputation risk, they should assess whether the credit union:

- Provides current and accurate financial statements and NCUA

5300 reports;

- Implements new accounting procedures and requirements

within acceptable time frames;

- Responds promptly to recordkeeping problems; - Provides accurate and timely member statements; - Responds promptly to members' concerns; and - Performs a thorough analysis of operational needs, staffing,

risk management systems, compliance issues, and long-term benefits, prior to implementing new products and services.

Overview

Examiners should use their professionaljudgment to tailor the general ledger review to the complexity of the credit union operation and the risks present in and around this operation. The review of a credit union's general ledger and its related subsidiary ledgers should give the examiner a clear impression of the credit union's financial position and its relative financial stability.

During the scope development process, examiners should review the supervisory committee audit report and, if necessary, the workpapers. Reviewing the prior examination report will assist in determining the scope of the general ledger review. The scope of the general ledger review will vary depending upon the following:

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GENERAL LEDGER

0 Reliability of the audit; 0 Concerns noted in previous examination or audit reports; 0 Interviews with management and staff; 0 Extent and quality of management's due diligence regarding the

credit union's products, services, and systems; 0 Review of internal audit work, if applicable; and 0 Review of the internal controls of the credit union.

tj741.6(b) of NCUA Rules and Regulations requires credit unions with assets of $10 million or more to present their NCUA 5300 in accordance with GAAP. Credit unions with less than $10 million in assets may present their financial statements using regulatory accounting principles as set forth in the Accounting Manualfor Federal Credit Unions.

Expanded Review Procedures

The depth of review necessary for each general ledger account will vary within a credit union and from one credit union to another. The most critical element for determining the degree of variance and the necessary depth of review is the examiner'sprofessionaljudgment, experience, and risk perception. Examiners can implement the following additional procedures when warranted:

0 Determine that the general ledger account balances with each respective subsidiary ledger total;

0 Review the debits and credits and analyze any unusual activity; and 0 Determine the propriety of the entries.

One effective method of reviewing or reconciling general ledger accounts is to trace entries to source documents or actual receipts. Except in unusual circumstances, the examiner should not audit or verify individual entries in either subsidiary ledgers or control accounts. If material inaccuracies exist in the general ledger accounts, examiners may support their analyses either by footnoting the credit union's financial statements or using the Statement of Financial Condition and Statement of Income. To avoid distortion of examination trends and ratios, the examiner prepares adjusting entries in the General Ledger Journal Adjustments when a material out-ofbalance condition exists between a subsidiary ledger and its general ledger control account.

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EXAMINER'S GUIDE

Red Flags

Some of the red flags in the accounting area that may require examiners to consider expanding their procedures include the following:

9 Ongoing recordkeeping problems; 9 Cash and bank reconciliations not complete, in arrears, or with

(fluctuating) out of balance amounts;

9 Excessive teller overages or shortages, either in number or amount; 9 IOU's in teller or vault cash; 9 Numerous erasures, corrections, whiteouts, line-outs; 9 Numerous voided or third party checks; 9 Numerous stale-dated outstanding checks; 9 Numerous stale-dated reconciling items; 9 Lump sum postings not conducive to good audit trail; 9 Checks or transactions receipts missing or out of sequence; 9 Timeliness of deposits not in accordance with Bylaw requirements,

if adopted by the credit union;

9 Bank account activity andor bank account balances (or share draft

clearingdtotal share draft balances) exceeding realistic needs;

9 Excessive number of depository accounts providing potential for

kiting; and

> Excessive cash/assets ratio (indicating poor cash management or

possibly fraud.)

Out-of-Balance Conditions

The examiner normally does not attempt to balance or audit subsidiary ledgers to the control accounts. The examiner should discuss the concern with management and obtain agreement for corrective action. (When examiners suspect fraud or embezzlement, they should immediately contact their supervisory examiners for further guidance.)

Materiality

The credit union's size and its ability to absorb potential losses may significantly affect what examiners consider material. In assessing the materiality of a general ledger account, the examiner considers its effect on the credit union's profitability and net worth. In some instances, the account may have minimal effect on the balance sheet, while it may have a material effect on the income statement. For example, overstating accrued income may have little or no effect on

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