PART 715—SUPERVISORY COMMITTEE AUDITS AND VERIFICATIONS Authority: 12 U.S.C. 1761(b), 1761d, 1782(a)(6). Source: 64 FR 41035, July 29, 1999, unless otherwise noted. § 715.1 Scope of this part. This part implements section 202(a)(6)(D) of the Federal Credit Union Act, 12 U.S.C. 1782(a)(6)(D), as added by section 201(a) of the Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 918 (1998). This part prescribes the responsibilities of the Supervisory Committee to obtain an annual audit of the credit union according to its charter type and asset size, and to conduct a verification of members' accounts. § 715.2 Definitions used in this part. As used in this part: (a) [Reserved] (b) Compensated person (c) Financial statements (d) Financial statement audit (e) GAAP (f) GAAS (g) Independent (h) Internal control (i) Reportable conditions (j) [Reserved] (k) State-licensed person (l) Supervisory committee (m) Supervisory committee audit (n) Working papers [64 FR 41035, July 29, 1999, as amended at 66 FR 65624, Dec. 20, 2001; 84 FR 53307, Oct. 7, 2019] § 715.3 General responsibilities of the Supervisory Committee. (a) Basic. (1) Meet required financial reporting objectives and (2) Establish practices and procedures sufficient to safeguard members' assets. (b) Specific. (1) Internal controls are established and effectively maintained to achieve the credit union's financial reporting objectives which must be sufficient to satisfy the requirements of the supervisory committee audit, verification of members' accounts and its additional responsibilities; (2) The credit union's accounting records and financial reports are promptly prepared and accurately reflect operations and results; (3) The relevant plans, policies, and control procedures established by the board of directors are properly administered; and (4) Policies and control procedures are sufficient to safeguard against error, conflict of interest, self-dealing and fraud. (c) Mandates. (1) Ensure that the credit union adheres to the measurement and filing requirements for reports filed with the NCUA Board under § 741.6 of this chapter; (2) Perform or obtain a supervisory committee audit, as prescribed in § 715.4 of this part; (3) Verify or cause the verification of members' passbooks and accounts against the records of the credit union, as prescribed in § 715.8 of this part; (4) Act to avoid imposition of sanctions for failure to comply with the requirements of this part, as prescribed in §§ 715.11 and 715.12 of this part. [64 FR 41035, July 29, 1999, as amended at 69 FR 27828, May 17, 2004] § 715.4 Audit responsibility of the Supervisory Committee. (a) Annual audit requirement. (b) Financial statement audit option. Compare (c) Other audit options. See Table 1 to § 715.4 Type of charter Asset size Minimum audit required to fulfill supervisory committee audit responsibility 1 Part 715 Federal Charter $500 Million or more Financial statement audit per GAAS by independent, State-licensed person 715.5 Less than $500 Million but greater than $10 Million Either financial statement audit or other supervisory committee audit $10 Million or less Supervisory committee audit. State Charter $500 Million or more Financial statement audit per GAAS by independent, State licensed person 715.6 Less than $500 Million Supervisory committee audit unless audit prescribed by State law is more stringent 1 See [64 FR 41035, July 29, 1999, as amended at 84 FR 1607, Feb. 5, 2019; 84 FR 53307, Oct. 7, 2019] § 715.5 Audit of Federal Credit Unions. (a) Total assets of $500 million or greater. (b) Total assets of less than $500 million but more than $10 million. (c) Total assets of $10 million or less. (d) Other requirements. [64 FR 41035, July 29, 1999, as amended at 75 FR 34621, June 18, 2010; 79 FR 5247, Jan. 31, 2014] § 715.6 Audit of Federally-insured State-chartered credit unions. (a) Total assets of $500 million or greater. (b) Total assets of less than $500 million. (c) Other requirements. § 715.7 Supervisory Committee audit alternatives to a financial statement audit. A credit union which is not required to obtain a financial statement audit may fulfill its supervisory committee responsibility by obtaining an Other Supervisory Committee Audit. [84 FR 53308, Oct. 7, 2019] § 715.8 Requirements for verification of accounts and passbooks. (a) Verification obligation. (b) Methods. (1) Controlled verification. (2) Statistical method. (i) Random selection: (ii) A sample which is representative of the population from which it was selected; (iii) An equal chance of selecting each dollar in the population; (iv) Sufficient accounts in both number and scope on which to base conclusions concerning management's financial reporting objectives; and (v) Additional procedures to be performed if evidence provided by confirmations alone is not sufficient. (3) Non-statistical method. (i) Sufficient accounts in both number and scope on which to base conclusions concerning management's financial reporting objectives to provide assurance that the General Ledger accounts are fairly stated in relation to the financial statements taken as a whole; (ii) Additional procedures to be performed by the auditor if evidence provided by confirmations alone is not sufficient; and (iii) Documentation of the sampling procedures used and of their consistency with GAAS (to be provided to the NCUA Board upon request). (c) Retention of records. § 715.9 Assistance from outside, compensated person. (a) Unrelated to officials. (b) Engagement letter. (c) Contents of letter. (1) Specify the terms, conditions, and objectives of the engagement; (2) Identify the basis of accounting to be used; (3) If an Other Supervisory Committee Audit, include an appendix setting forth the procedures to be performed; (4) Specify the rate of, or total, compensation to be paid for the audit; (5) Provide that the auditor shall, upon completion of the engagement, deliver to the Supervisory Committee a written report of the audit and notice in writing, either within the report or communicated separately, of any internal control reportable conditions and/or irregularities or illegal acts, if any, which come to the auditor's attention during the normal course of the audit (i.e., no notice required if none noted); (6) Specify a target date of delivery of the written reports, so that such target date will enable the credit union to meet its annual audit requirements in this part; (7) Certify that NCUA staff and/or the State credit union supervisor, or designated representatives of each, will be provided unconditional access to the complete set of original working papers, either at the offices of the credit union or at a mutually agreed upon location, for purposes of inspection; and (8) Acknowledge that working papers shall be retained for a minimum of three years from the date of the written audit report. (d) Complete scope. (e) Exclusions from scope. (1) Identify the excluded items; (2) State that, because of the exclusion(s), the resulting audit will not, by itself, fulfill the scope of a supervisory committee audit; and (3) Caution that the supervisory committee will remain responsible for fulfilling the scope of a supervisory committee audit with respect to the excluded items. [64 FR 41035, July 29, 1999, as amended at 84 FR 53308, Oct. 7, 2019] § 715.10 Audit report and working paper maintenance and access. (a) Audit report. (b) Working papers. [64 FR 41035, July 29, 1999, as amended at 84 FR 1607, Feb. 5, 2019] § 715.11 Sanctions for failure to comply with this part. (a) Sanctions. (1) The regional director to reject the supervisory committee audit and provide a reasonable opportunity to correct deficiencies; (2) The regional director to impose the remedies available in § 715.12, provided any of the conditions specified therein is present; and (3) The NCUA Board to seek formal administrative sanctions against the supervisory committee and/or its independent, compensated auditor pursuant to section 206(r) of the Federal Credit Union Act, 12 U.S.C. 1786(r). (b) State Charters. § 715.12 Statutory audit remedies for Federal credit unions. (a) Audit by alternative licensed person. (1) The Supervisory Committee has not obtained an annual financial statement audit or performed a supervisory committee audit; or (2) The Supervisory Committee has obtained a financial statement audit or performed a supervisory committee audit which does not meet the requirements of part 715 including those in § 715.8. (3) The credit union has experienced serious and persistent recordkeeping deficiencies as defined in paragraph (c) of this section. (b) Financial statement audit required. (c) “ Serious and persistent recordkeeping deficiencies. Appendix A to Part 715—Supervisory Committee Audit—Minimum Procedures 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 all • 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: ○ Loans ○ Cash on deposit ○ Investments ○ Shares ○ Borrowings • Test material equity, income, and expense accounts • Test for unrecorded liabilities • Review key internal controls including, at a minimum: ○ Bank reconciliation procedures ○ Cash controls ○ Dormant account controls ○ Wire and ACH transfer controls ○ Loan approval and disbursement procedures ○ Controls over accounts of employees and officials ○ Other real estate owned ○ 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]