Planes de Acción

Exam ples o f Control O bjectives and Related C ontrols fo r D erivatives and H edging A ctivities

C ontrol O bjective

Information relating to derivatives and derivatives transactions is complete and accurate.

Derivatives accounted for as hedges meet the designation, documentation, and assessment requirements of generally accepted accounting principles. R elated Controls

Lists of authorized derivatives brokers and coun­ terparties are maintained and updated periodically, and supervisory personnel periodically review docu­ mentation of derivatives transactions to determine whether only authorized brokers and counterparties were used.

The board of directors, generally through its finance, asset/liability, investment, or other committee, re­ views reports of derivatives transactions to deter­ mine that the entity's guidelines for derivatives transactions are being complied with.

The board of directors, generally through its finance, asset/liability, investment, or other committee, must approve changes in derivatives policies, and ap­ proval must be documented.

Duties among those who initiate derivatives trans­ actions, have access to the underlying instruments, and post or reconcile related accounting records are appropriately segregated, and supervisory person­ nel regularly review reconciliations of information provided by individuals performing these functions. Deal initiation records are sufficient to identify the nature and purpose of individual transactions. Supervisory personnel obtain counterparty confir­ mations, match them against the entity's records, and investigate significant differences.

Supervisory personnel monitor agreements to de­ termine that embedded derivatives have been iden­ tified and properly accounted for.

Supervisory personnel periodically review account­ ing entries supporting derivatives transactions. Supervisory personnel periodically review reconcil­ iations of subsidiary ledgers with general ledger ac­ counts.

The board of directors, generally through its fi­ nance, asset/liability, investment, or other com­ mittee, monitors activities that present risks that may be hedged through derivatives to determine whether derivatives were entered into and recorded. Documentation, designation, and review are dated. Supervisory personnel review documentation and designation at the time a derivative is entered into to determine that it conforms with generally ac­ cepted accounting principles.

Supervisory personnel review the periodic assess­ ments to determine that they conform with gener­ ally accepted accounting principles.

Exhibit 5 -4 —continued

Exam ples o f Control O bjectives and R elated Controls fo r D erivatives and H edging Activities C ontrol O bjective

The carrying amount of derivatives is adjusted to fair value, and changes in the fair value of derivatives are accounted for in conformity with generally accepted accounting principles.

Derivatives are monitored on an ongoing basis to recognize and measure events affecting related financial statement assertions.

R elated Controls

The board of directors, generally through its finance, asset/liability, investment, or other committee, mon­ itors the documentation, designation, and assess­ ment.

Supervisory personnel periodically review the recorded fair values of derivatives and investigate significant differences from the amounts expected. Supervisory personnel periodically review the ac­ counting for unrealized appreciation and depreci­ ation in the fair value of derivatives to determine that it is in conformity with generally accepted ac­ counting principles.

Supervisory personnel regularly review recorded derivatives and amounts included in accumulated other comprehensive income to determine that events affecting their presentation and disclosure are considered, such as hedged transactions that are no longer probable.

* The entity may have procedures to analyze alternative derivatives and extensions according to the entity's intent. For example, analyses prepared for derivatives the entity is considering entering into may include sensitivity analyses that show the effect on the carrying amount and net interest income of various interest-rate and prepayment scenarios. Such analyses may also evaluate the effect of derivatives on the entity's overall exposure to interest-rate risk. An analysis might also be performed to evaluate the reasonableness of interest-rate and prepayment assumptions provided by the counterparty or selling broker. Relevant controls may also include a review by management of contractual documents to ascertain the rights and obligations of all parties to the transaction, as well as the recourse available to each party.

5.44 Many of the controls for derivatives may be performed directly by se­ nior management. While management's close attention to derivatives transac­ tions can be an effective control, the auditor should be alert to potential abuses and overrides of policies and procedures.

5.45 As discussed in paragraph 5.27, the auditor should consider the size of the entity, the entity's organizational structure, the nature of its operations, the types, frequency, and complexity of its derivatives transactions, and its controls over those transactions in designing auditing procedures for assertions about derivatives. Gathering evidential matter about the operating effectiveness of controls placed in operation by the entity or a service organization may en­ able the auditor to vary the nature, timing, or extent of substantive tests. In addition, as discussed in paragraphs 5.30 and 5.31, in some circumstances, it may not be practicable or possible for the auditor to reduce audit risk to an acceptable level without identifying controls placed in operation by the entity

or a service organization and gathering evidential matter about their operating effectiveness.

5.46 Illustrations of the tests an auditor may perform to gather eviden­

tial matter about the operating effectiveness of controls over derivatives and hedging activities follow.

• Tests o f controls that the entity has implemented to ensure that

derivatives transactions are initiated in accordance with manage­ ment's established policies may include—

— Testing the computer controls that prohibit the entering into o f transactions beyond established limits.

— Inspecting documentation of the review by supervisory personnel of documentation of derivatives transactions to determine whether only authorized brokers and coun­ terparties were used and testing some o f the transactions the supervisory personnel reviewed.

— Inspecting minutes of meetings o f the board o f directors, or its finance, asset/liability, investment, or other com­ mittee, for evidence o f review of reports of derivatives transactions and for evidence of approval o f changes in derivatives policies.

• Tests o f controls that the entity has implemented to ensure that

information relating to derivatives and derivatives transactions is complete and accurate may include—

— Inspecting documentation o f the review by supervisory personnel o f reconciliations of information about deriva­ tives transactions provided by the segregated functions and testing some o f the reconciliations they reviewed. — Inspecting documentation o f the confirmation procedures

performed by supervisory personnel and testing some of their reconciliations o f recorded derivatives to counter­ party confirmations noting the timeliness o f the confir­ mations.

— Inspecting documentation of the monitoring by supervi­ sory personnel of agreements for embedded derivatives and testing some of the conclusions they reached. — Inspecting documentation o f the review by supervisory

personnel of accounting entries and testing some o f the entries they reviewed.

— Inspecting documentation of the review by supervisory personnel o f reconciliations o f subsidiary ledgers with general ledger accounts and testing some o f the recon­ ciliations they reviewed.

— Inspecting minutes of meetings o f the board of directors, or its finance, asset/liability, investment, or other com­ mittee, for evidence o f monitoring activities that present risks that may be hedged through derivatives and testing some o f the conclusions they reached.

Tests o f controls that the entity has implemented to ensure that derivatives accounted for as hedges meet the designation, docu­ mentation, and assessment requirements of generally accepted accounting principles may include—

— Inspecting documentation of the review by supervisory personnel of the documentation, designation, and initial and continuing assessments and for some o f the hedges reviewed examining the documentation and testing the assessments.

— Inspecting minutes o f meetings o f the board o f directors, or its finance, asset/liability, investment, or other com­ mittee, for evidence of review o f hedging activities. Tests of controls that the entity has implemented to ensure that the carrying amount of derivatives is adjusted to fair value and changes in the fair value of derivatives are accounted for in confor­ mity with generally accepted accounting principles may include— — Inspecting documentation of the review by supervisory

personnel o f recorded fair values and testing some o f the significant differences investigated during those reviews. — Inspecting documentation o f the review by supervisory

personnel of the accounting for unrealized appreciation and depreciation in the value o f derivatives and testing some of the reclassifications they reviewed.

Tests of controls that the entity has implemented to ensure that derivatives are monitored on an ongoing basis to recognize and measure events affecting related financial statement assertions may include—

— Inquiring of supervisory personnel about whether deriva­ tives transactions are being monitored on a timely basis. — Inspecting documentation o f the review by supervisory

personnel o f recorded derivatives and amounts included in accumulated other comprehensive income and test­ ing some o f the derivatives and amounts in accumulated other comprehensive income they reviewed.

Summary: Audit Im plications

The auditor should gain an understanding o f internal control suf­ ficient to plan the audit. If a service organization provides ser­ vices that are part o f the entity's information system, the auditor should consider whether information about the service organiza­ tion's controls will be needed to plan the audit.

To assess control risk below the maximum, the auditor should per­ form procedures to gather evidential matter about the operating effectiveness o f controls over derivatives and securities transac­ tions. Those controls may include controls implemented by one or more service organizations that provide services that are part of the entity's information system, as well as those implemented by the entity.

Chapter 6