Contributed June 27, 2001 by jackline staats *** AUDIT MANUAL *** MUNI DESK REVIEW Objectives: 1. To determine the adequacy of existing policies and procedures and whether they are current or not. 2. To ascertain that proper segregation of duties exists. 3. To verify compliance with internal policies and procedures, and laws and regulations. 4. To ascertain that pertinent legal documentation is obtained before the first transaction with the counterparty takes place. 5. To determine that transactions settled without incidence. 6. To ensure that all trades are accurately captured and accounted for by Middle Office. Pre-audit Action: 1. Obtain the followings: * BankOne Cashflows and Daily Cash Report * Munilist spreadsheet for all outstanding deals * IA Actual Payments Tickler * IA Current Balance Report * FPA Delivery Tickler * Swaps and Caps Cashflow Tickler * Outstanding Muni Transactions and Activity Report * Management Month-end and Monthly Transaction Volume Report * Tender Option Bond Rate Resets Procedures: Monthly Activity 1. Review the Monthly Activity Report a. Reconcile the Monthly Activity Report to the Munilist (Outstanding List). b. Reconcile the new deal revenue to P&L Statement. c. Review the variance report for new transactions. 2. Note any unusual variances. Discuss with management. Documentation 1. Select a sample of new transactions effected since the last audit. Verify that the following documents are obtained: a. Forward Supply Contracts * Forward Supply Agreement * Verification Report from a CPA * Incumbency Certificates * Official Statement of Escrow Fund * Opinion of Counsel * Escrow Deposit Agreement * Distribution List. b. Municipal Investment Agreements * Investment Agreement * Opinions of the Counsel * Incumbency Certificates * Distribution List. c. Municipal Swaps * Interest Rate Swap Agreement * Board Resolutions * Guarantee of The Sakura Bank, Limited * Opinions of the Counsel * Incumbency Certificates * Rating Letters from Rating Agencies * Certificate of Representation * Distribution List d. Tenor Option Bonds * Custody Agreement * Tendor Option Agreement * Remarketing Agreement * Guarantee of The Sakura Bank * Opinion of Counsel * Evidence of Authority 2. Ensure that the documents listed above are properly executed and signatures are duly verified. 3. Ensure that outstanding documents are properly follow-up. Deal Captures 1. From the munilist or from the new deals identified in Monthly Activity Section, select a sample of transactions. a. Ensure that the transactions are adequately captured by tracing details to trade tickets. b. Verify that confirmations are received from broker/counterparty. c. Verify that transactions are properly approved by the marketers, risk manager, Credit Department and Middle Office. d. Ensure that trade tickets contain no white-outs and cross-outs are initialed by the trader. 2. For the transactions selected above, verify that the transactions are accurately reflected in the customer's monthly statement. 3. Obtain the term sheet prepared for the above selected transactions, ensure that the details listed on the trade ticket mirror those listed on the term sheet. 4. Determine that all new deals are valued on the system 5. Determine that the trade folders are maintained in an orderly fashion. Settlement 1. Obtain the Cash Projection Report. a. Identify payment and receipts due on a given date. b. Verify that payment and receipts anticipated are actually occurred. c. Verify that preadvices of all payments to and from customers are sent to the customers two weeks prior to the value date. d. If a fail occurred, determine that appropriate actions were taken to resolve the discrepancies on a timely manner. 2. If compensation occurred, ensure that proper approval is obtained and the calculation is accurate. 3. Obtain the compensation claim/back value status report and determine accuracy. 4. Verify that payments, deposits, settlements are put on BankOne and the Daily Cash Report. 5. Verify that SYSTEM is updated for all Investment Agreement transactions. Investment Agreements 1. Monthly Reconciliation of Custodian/Collateral Accounts For a sample of months, obtain the Monthly Reconciliation of Custodian Accounts/Repurchase Agreements. a. Verify that collateral have been reconciled to the applicable custody statements. b. Verify the accuracy of the reconciliation. c. Verify that any discrepancies have been researched and resolved in a timely manner. d. Ensure the reconciliation contains evidence of review. 2. Collateral Valuations a. Verify that collateral valuation is performed weekly. b. Verify that all securities currently held for collateral purposes are updated. c. Ensure that the deals are sufficiently collateralized. If not, determine if additional collateral has been requested. d. Verify that the inputs are accurate by tracing to source document. 3. Collateral Movements a. Ensure that new valuations are performed for any additional collateral, collateral excess and collateral substitution. 4. Daily Valuation (Present Value) a. Determine that investment agreements are valued daily on SYSTEM. Tender Option Bond 1. Rate Reset a. Verify that Middle Office resets rates weekly. b. Verify input to ensure accuracy. Forward Purchase Agreement 1. For the sample selected in the Deal Capture section, review the deal folders. Documents on file should include: * Signed Municipal Agreement Ticket * T-Bill Forward Worksheet including a section for the Initial Deal Profit * Document Distribution List * Letter summarizing the terms and conditions of the contract * Cash flow worksheet * Letter sent for confirmation of payment instructions * Letter for confirmations of broker fees 2. Review the Cashflow Worksheet curves used, dates, and value agreed to those in the T-bill Forward Worksheet. 3. Reconcile Broker Fee in the T-bill Forward Worksheet to invoice from the broker. 4. Reconcile notices of disbursements to Cashflow worksheet. 5. Determine that forward purchase agreements are valued daily on SYSTEM.