section x 185- internal control system

7/28/2019 Section X 185- Internal Control System

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INTERNAL CONTROL -defined as a process effectedby an organization's structure, work and authorityflows, people and management information systems,designed to help the organization accomplish specificgoals or objectives.[1] It is a means by which anorganization's resources are directed, monitored, andmeasured. It plays an important role in preventingand detecting fraud and protecting the organization'sresources, both physical (e.g., machinery andproperty) and intangible (e.g., reputation orintellectual property such as trademarks).

Section X 185- Internal ControlSystem


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Objective of Internal Control Reliability of financial reporting

Effectiveness and efficiency of operations

Compliance with applicable laws and regulations

Functions of Internal Control Preventive Control

Detective Control Corrective Control


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COMPONENTS OF INTERNAL CONTROL

SYSTEM

1. Control Environment

2. Risk Assessment

3. Control Activities

4. Information and Communication

5. Monitoring Controls


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a. All banks shall maintain proper and adequateaccounting records.

b. These records should be kept up-to-date and shallcontain sufficient detail so that an audit trail isestablished.

c. All tickets shall bear official approval and should beinitiated by the person originating and anotherperson by checking them.

X185.1 (2008 - X163.1) Proper

accounting records


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a. Independent balancing shall mean that recordsposted by a person or cash held by a teller or cashiershall be balanced or counted by another person.

b. The following minimum independent balancingprocedures shall be adopted:

(1) Monthly reconciliation of general ledger balances

against respective subsidiary and supporting recordsand documentation by someone other than thebookkeeper or the person handling the records;

X185.2 (2008 - X163.2) Independentbalancing


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(2) Irregular and unannounced count of tellers cash andchecks and other cash items at least twice a month and vaultcash including Automated Tellering Machines (ATM) cashdispensers at least once a month by the auditor/controlofficer or by an officer not connected with cash department;

(3) Monthly reconciliation of due from banks, cash in bankaccounts (domestic and foreign) and due from/to headoffice/ branches by someone other than the person handlingthe records or posting the general ledger entries;

(4) Periodic verification of securities and collaterals by

someone other than their custodian; and

(5) Periodic verification of the accuracy of the interest creditsto deposit liabilities accounts.


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a. The duties of all the officers and employees shall besegregated, clearly defined, understood, documented andmanualized. No individual shall have complete authority andresponsibility for handling all phases of any transaction frombeginning to end, without some check or balance from someother part of the organization.

b. The physical handling of a transaction shall be separatedfrom its recording and supervision as follows:

(1) A person handling cash shall not be permitted to post theledger records nor should posting the general ledger beperformed by an employee who posts the

depositors subsidiary ledgers;

X185.3 (2008 - X163.3) Division ofduties and responsibilities


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(2) A lending officer shall never be allowed to disburseproceeds of notes, accept note payment nor post loan

ledgers;(3) The functions of issuing, recording and signing ofdrafts/checks shall be separated;

(4) Checks and other cash items shall be maintained

either by an employee not handling cash or by theRack/Distributing Department provided that adequatecontrol as to custody and disposition of funds areproperly maintained;

(5) The receipt of statements from depository bankshall be assigned to an employee other than the oneconnected with the preparation, recording and signingof bank drafts;


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(6) Custodians of securities shall not be allowed to handle securitytransactions;

(7) Collateral appraisal shall be done by an employee/officer who does not

approve loans;

(8) Incoming checks and other cash items shall be recorded chronologically in aregister by an employee other than the bookkeeper before they are forwardedfor posting purposes;

(9) Credit reports shall be obtained by someone other than lending officers;

(10) Mailing of customers statements and delinquent notices shall be done byan employee other than the one who granted the loan or the one handling therecords; and

(11) Dispatching and delivery of current account statements shall be done by

someone who is not involved in current account operations.c. Extensive background checking of persons intended to be assigned tohandle cash and securities shall be conducted. Frequent follow-up checkingafter their employment shall also be made.


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a. Joint custody shall mean the processing of transactions inthe presence of and under the direct observation of asecond person. Both persons shall be equally accountablefor the physical protection of the items and recordsinvolved.

b. Physical protection shall be deemed established throughthe use of two (2) locks or combinations on a file chest orvault compartment.

c. Two (2) or more persons shall be assigned to each half ofthe control so that operating efficiency is not impaired if

one (1) person is not immediately available.d. Persons who are related to each other within the third

degree of consanguinity or affinity shall not be made jointcustodians.

X185.4 (2008 - X163.4) Joint Custody


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e. The following shall be under joint custody:(1) Cash in vault and in ATM cash dispensers;(2) All accountable forms;(3) Collaterals;

(4) Securities;(5) Documents of title and/or ownership of properties or fixed assets;(6) Dormant or inactive deposit ledgers/EDP print-outs and corresponding

signature cards including on-line posting of dormant/inactive accounts;(7) Import documents;(8) Trust receipts;

(9) Collection items;(10) Duplicate keys, safe deposit spare locks and keys, and keys to unrentedsafe deposit boxes;

(11) Safekeeping items;(12) Vault door and safe combinations;(13) Unissued specimen signature books;(14) Correspondents and banks own telegraphic and/or electronic fund

transfer system or cable test keys currently in use;(15) Test key fixed numbers unissued;(16) Unissued and captured ATM cards and similar devices;(17) Access locks and keys to on-line EDP terminals and similar devices; and(18) Access locks and keys to EDP mainframes and peripherals.


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Signing authorities for the different levels of officers tosign for and in behalf of the banks shall be approvedby the board of directors and the extent of each levelof authority shall be clearly defined. These signing

authorities shall include but need not be limited tothe following:

a. Lending;

b. Investment;

c. Approval of expense;

d. Various supervisory reports; and

e. Bank drafts, managers/cashiers checks, bank moneyorders and certificates of time deposit.

X185.5 (2008 - X163.5) Signingauthorities.