Due-From Foreign Banks — Demand (Nostro Accounts) Policy Internal Audit Checklist
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
1.
Has the board of directors, consistent
with its responsibilities and duties,
adopted a written policy for “due-from
foreign banks — demand” accounts
(nostro accounts) for international
banking activities that:
a.
Establishes standards for transfers
and reporting?
b.
Defines the types of reconcilements
and reports that should be produced?
c.
Establishes minimum data elements
that should be available for reporting
purposes?
2.
Are “due-from foreign banks — demand”
accounts policies related to international
banking reviewed at least annually to
determine if they are compatible with
changing bank activities?
3.
Determine the number of the last
unissued draft of each “due-from foreign
banks — demand” account and record for
comparison when performing
reconcilements.
Yes
No
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Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
4.
Prepare, or request that bank personnel
prepare, a listing of all “due-from foreign
banks — demand” accounts together with
their balances from the bank’s records (or
daily statement) as of the audit date. The
listing should give separate totals for
“due-from foreign banks — demand,”
due-from central banks (demand
accounts), overdrawn nostro accounts,
and “due-from foreign affiliated banks —
demand.” Compare each total to the
appropriate subtotal in the general ledger
as of the audit date.
(Note: Ideally, the statement cutoff
should be as of the audit date; however,
this date may be altered as the auditor in
charge deems appropriate.)
5.
Request the bank to arrange for a cutoff
statement for each “due-from foreign
banks — demand” account. Include
instructions that the statements be done in
the name of the bank on its letterhead and
returned to its auditing department with a
code designed to direct confirmations to
the audit staff unopened (see note to step
4).
6.
Arrange to have any other cutoff
statements delivered unopened to the
audit staff daily for several days after the
audit date.
7.
Request that all return items be delivered
to the audit staff unopened for at least
three days following the start of the audit
and review them for any items that are
large, unusual, or on which a bank
employee, officer, or director is maker,
payee, or endorser.
Yes
No
Perf.
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Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
8.
In preparing or reviewing
reconcilements:
a.
Review reconciling items carefully
to determine that the time period
between debit or credit entries by the
bank under audit and the offsetting
credit or debit by the foreign
correspondent bank is comparable
for similar types of items. If any
differences in timing occur, ascertain
the reason.
b.
Determine that wire transfers appear
on the correspondent statement the
same day as entered on the bank’s
books. Determine the reason for any
exception.
c.
Test all drafts included in the cutoff
statement for authorized signature,
proper endorsement, dates of drafts,
payee, and amounts and determine
that:

Date drawn is not after date paid
by the correspondent bank.

Drafts issued to transfer funds
from the bank’s account to the
foreign correspondent’s account
are not outstanding more than
the normal transit time.

All drafts are numbered.

Drafts are issued sequentially.
Yes
No
Perf.
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Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
9.
Using an appropriate sampling technique,
select “due-from foreign banks —
demand” accounts and reconcile on a
reconcilement form using the following
steps:
(Note: Unless controls and audit
procedures are extremely lax or suspect,
the auditor in charge should waive the
actual reconcilement of the account and
direct that this procedure be performed
by bank personnel under the supervision
of audit staff. Before turning the cutoff
statements over to bank personnel for
reconcilement, the audit staff should
photocopy them to prevent alteration.
The audit staff should obtain a copy of
the reconcilement when completed and,
for the accounts selected in the sample,
determine the accuracy and test the
reconcilement).
a.
Insert “our balance to their debit”
and the date as shown on the general
ledger. If the balance is overdrawn,
show on line “our balance to their
credit.”
b.
Insert “their balance to our credit”
and the date as shown on the
correspondent bank’s cutoff
statement. If the balance is
overdrawn, show on line “their
balance to our debit.”
c.
Prove the mathematical accuracy of
the prior reconcilements by a
machine run of the figures.
Yes
No
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
d.
Determine that “our balance to their
debit” agrees to the general ledger as
of the prior reconcilement date.
e.
Determine that “their balance to our
credit” agrees to the correspondent
bank’s statement as of the prior
reconcilement date.
f.
Determine that the closing balance
and date listed on the statement used
in the bank’s last reconcilement
agree to the opening balance and
date listed on the cutoff statement as
of the audit date. If any intervening
cutoff statements were received,
determine that new opening balances
and dates always agree with the
previous statements’ closing
balances and dates.
g.
Check any open “we debit — they
do not credit” item from the previous
reconcilement to determine if credit
has been given on a later cutoff
statement from the foreign
correspondent.
h.
Do the same for any “we credit —
they do not debit” item to determine
if a debit has been made on a later
cutoff statement from the foreign
correspondent.
i.
Check any open “they debit — we
do not credit” item from the previous
reconcilement to determine if a
credit has been made to the bank’s
general ledger.
Yes
No
Perf.
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Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
j.
Do the same for any “they credit —
we do not debit” item to determine if
a debit has been made to the bank’s
general ledger.
k.
If any items on a previous
reconcilement do not clear, list them
on the reconcilement form being
prepared.
l.
Determine that each debit and credit
entry shown on the bank’s general
ledger since the date of last
reconcilement is offset by a
corresponding credit or debit on the
foreign correspondent bank’s cutoff
statement. If a debit or credit is
posted in error, the item may “clear”
by an offsetting credit or debit on the
general ledger, if made by the bank
under audit, or on the cutoff
statement, if made by the foreign
correspondent bank.
m. Any items on the general ledger,
except outstanding drafts, that are
not offset by an appropriate debit or
credit on the foreign correspondent
bank’s cutoff statement are
considered “open” and should be
transferred to the reconcilement form
under the appropriate “we debit” or
“we credit” caption, along with the
date and a brief description.
Yes
No
Perf.
by &
Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
n.
Any items on the foreign
correspondent bank’s cutoff
statement that are not offset by an
appropriate debit or credit on the
bank’s general ledger are considered
“open” and should be transferred to
the reconcilement form under the
appropriate “they debit” or “they
credit” caption, along with the date
and a brief description.
o.
“We credit” items that represent
drafts outstanding should not be
listed on the “we credit” section of
the reconcilement form. Each
outstanding draft should be listed by
number on the reverse side of the
reconcilement form and the total
should be carried forward opposite
the caption “drafts outstanding.” Any
drafts still outstanding from the
previous reconcilement should be
included in the listing.
p.
Prove the reconcilement by totaling
the right-hand and left-hand columns
on the reconcilement form. Proof is
established when the two balances
agree.
10. Using the latest cutoff statement received
from the foreign correspondent bank,
determine clearance of “we debit” and
“we credit” items, and:
a.
Carefully determine that all debits on
or about the date of the audit are
satisfactorily accounted for and are
not an attempt to conceal a shortage.
Yes
No
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[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
b.
Enter dates cleared on the
reconcilement form under the
heading “date since credited” or
“date since debited.”
c.
Indicate that the entry was proper
and that transit time was normal by
circling the clearance date on the
reconcilement form.
d.
If an item is cleared by reversing the
entry, that is, by a subsequent
offsetting debit or credit entry on the
ledger of the bank under audit, check
the entry through to its source.
e.
If the entry involves excess transit
time, confirm to the foreign
correspondent bank.
f.
Investigate all large items to the
ledger to determine that they are
legitimate.
g.
All material “we debit” and “we
credit” items that do not clear on
later cutoff statements received
should be confirmed, with a copy of
the confirmation tracer retained for
comparison with the original after it
is returned. Confirmation forms and
return envelopes should be prepared:

By bank staff under audit staff
supervision.

On bank letterhead and signed
by the auditor.
Yes
No
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]

h.
Using the bank’s return address
with a code designed to direct
such routings to the audit staff.
(If time does not permit the
return of the confirmation tracer
during the audit, the return
envelope should be directed to
the regional office and the copy
of the confirmation tracer should
be sent to the regional office for
comparison.)
A record of “we debit” and “we
credit” items that are not considered
material should be retained for
review at the next audit to determine
the propriety of their disposition.
11. Using general ledger or appropriate
subsidiary ledgers, determine clearance
of “they debit” and “they credit” items:
a.
All items should clear during audit
either by an offsetting credit or debit
to the bank’s ledgers or by the
correspondent bank reversing the
entry.
b.
Enter dates cleared on the
reconcilement form under the
heading “date since credited” or
“date since debited.”
Yes
No
Perf.
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Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
c.
The reason for non-clearance should
be determined for all “they debit”
and “they credit” items that do not
clear in a reasonable amount of time.
The validity of the reason for nonclearance should be established and
documented on the reconcilement
form. Any material items that are not
satisfactorily resolved should be
brought to the attention of the auditor
in charge.
12. Indicate on the master listing of all “duefrom foreign banks — demand” accounts,
next to each bank balance, that the
account has been reconciled and that
open items have been cleared or
confirmed. When open items have been
subsequently verified, indicate that fact.
13. Using appropriate sampling techniques,
select “due-from foreign banks —
demand” accounts from the listing
obtained in step 4 and:
a.
Trade profit or loss entries resulting
from the revaluation of net open spot
positions that were passed to the
respective “due-from foreign banks
— demand” (nostro) accounts.
b.
Check that at the maturity of a
forward exchange contract, proper
entries are made to the respective
“due-from foreign banks — demand”
(nostro) accounts and forward
revaluation adjustment accounts.
Yes
No
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Date
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Comments
[Institution’s name]
[Department(s) under review]
[Head(s) of department under review]
c.
Test to be sure that when swap
forward contracts are delivered, the
correct entries are passed to the
applicable “due-from foreign banks
— demand” (nostro) accounts and
swap adjustment account.
d.
Investigate any one-sided entries,
that is, an entry only to the foreign
currency ledgers but not to the dollar
(or local currency) book value
ledgers, which might disclose kiting
or fraud.
Yes
No
Perf.
by &
Date
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Comments