Cal. Code Regs. tit. 10 § 1787.1

Current through Register 2024 Notice Reg. No. 45, November 8, 2024

Section 1787.1 - Preparation of Independent Audit Report

A check seller shall furnish an independent audit report pursuant to the following instructions:

STATE OF CALIFORNIA DEPARTMENT OF BUSINESS OVERSIGHT

INSTRUCTIONS FOR INDEPENDENT AUDIT PURSUANT TO THE CALIFORNIA CHECK SELLERS, BILL PAYERS AND PRORATERS LAW

To Licensee and the Accountant:

These instructions have been prepared as an aid to licensees and their independent accountants in the preparation of the audit report to be filed with this Department pursuant to Section 12304 of the Check Sellers, Bill Payers and Proraters Law (Law) (Financial Code, Division 3).

There are set forth in these instructions certain requirements which must be included in the accountant's comments and certain auditing procedures to be performed in the conduct of the audit in order that the report be acceptable to the Department in accordance with Section 12304 and the proper administration of that section. The requirements included herein are a part of and/or in addition to generally accepted accounting principles and auditing procedures applicable in the circumstances.

It will be noted that these requirements have been developed by adapting generally accepted accounting principles and auditing procedures so as to follow the express provisions of Section 12304 of the Law and these rules.

These instructions set forth minimum audit procedures and are not in any manner intended to restrict the judgment of the independent public accountant where in his/her opinion the circumstances warrant the employment of additional procedures.

The report may be filed with any office of the Department of Business Oversight.

AUDIT REPORT AND PROCEDURES

Balance Sheet and Statement of Income:

These financial statements must in all cases be audited statements prepared on an accrual basis accompanied by a short or long form accountant's report, including an opinion meeting the standards of the California Board of Accountancy with no material qualifications. (Rule 58 of the Board of Accountancy.) The financial statements shall include a balance sheet which must be as of the end of the licensee's fiscal year or in the case of a closing audit report, shall be as of the date of expiration, surrender or revocation of license, and a statement of income for the fiscal year or period then ended.

The following items must be taken into consideration by the accountant in examining the financial statements of a licensee under the Law (other than a general prorater), when applicable to the particular business of the licensee.

(a) If licensee is engaged in other businesses, in addition to the licensed business, all assets and liabilities of other businesses must be included in the balance sheet submitted. All income and expenses of other businesses must be included in the statement of income submitted.

(b) The money order and bill collection liabilities at the balance sheet date, should be shown as a deduction from the trust bank account on the asset side of the balance sheet rather than showing the net amount, if any, in the trust bank account.

(c) The accountant shall enumerate in detail, in comments included in the report, the auditing procedures employed in verifying the money order and bill collection liability. The accountant's verification shall include observation of the preparation of the individual outstanding money order (trust subsidiary ledger) tabulation and sufficient test checks of this procedure to ascertain that the tabulation was proper. The subsidiary ledger should be reconciled with the trust control account. Shortages (excess of subsidiary over control) should be covered by the licensee's deposit of general funds in the trust account. Overages (excess of control over subsidiary) should be noted and carried forward to subsequent tabulations.

The accountant's verification shall also include a selective examination of the old outstanding money orders and the propriety of the clearings against these dormant items. Permanent old outstanding audit listings should be maintained by the accountant for this purpose. Dormant outstanding items should be traced through the escheat date, and should not be subjected to service charges or other fees.

An examination shall be made, on a test-check basis, of the money orders issued and bill collections made prior to the last day of the calendar or fiscal year under examination but which were outstanding on that date and which cleared the trust account subsequent to the last day of the calendar or fiscal year being examined. The purpose of the examination shall be to determine that such money orders and bill collections have been included in the money order and bill collection liability as at the end of the calendar year or fiscal year under examination, and the test check shall be sufficient to enable the accountant to make such determination.

The withdrawal by the licensee of money order or bill collection fees should be reviewed for propriety. The collection and payment of utility bills should be examined for timely remittances and proper handling.

Precleared money orders (money orders which have cleared the trust bank account but have not been reported and/or paid for by agents) should be tested for a period before and after the balance sheet date and a proper cut-off established. The validity of the preclears should be determined by tracing of money orders clearing subsequent to the cut-off and by comparing preclears with agent's reports processed after the cut-off date. Preclears should be aged by dollar amount for each agent and considered in the examination of agent's reporting practices-see item (e) below.

(d) The accountant shall include in the report or in a separate letter over his/her signature, a brief description of the system of internal control, its weaknesses, if any, and recommendations for improvement, if any. Such report or letter may incorporate by reference all or part of any previous report or letter to the Commissioner.

(e) In the event the licensee has agents, and after a detailed review of preclears and a determination of which agents are not complying with Section 12300.4 of the Law, the agents comprising the top 25% of the non-complying group shall be concentrated on and visits arranged to agency locations selected from among that group. Care should be taken to note substantial violators not on the preclear list (i.e., agents may submit reports without payment; these reports may be processed by the licensee in which case the agent would not, appear on the preclear list in any substantial amount). In these cases bank reconciliations and/or "due from" agent accounts should be carefully examined. It should be noted that trust funds consist only of cash or cash in transit from agents. Emphasis should be placed on larger agents that could, in the event of a cash shortage, financially impair the licensee. In visits to the agent's location, the independent accountants' function will be to accompany licensee's personnel and observe cash count and collection of amounts due for all money orders sold and not reported. The accountant should verify the deposit of these trust funds into the bank. The accountant should verify whether all cash shortages have been covered by the licensee's deposit of general funds. There shall be included in the report a schedule of those agents cash short and those agents not complying with the three-day reporting requirement, and comments on action taken by the licensee, if any, in connection therewith pursuant to Section 12301.4 of the Law. Independent accounts shall assess the materiality of overall agent reporting deficiencies that may be sanctioned or allowed by the licensee and disclose improper reporting practices, especially of larger agents that could financially impair the licensee. A statement to this effect shall be made in the independent accountant's report.

(f) Include a statement to the effect that the accountant has examined the books and records with respect to the provisions of the Uniform Disposition of Unclaimed Property Law (Code of Civil Procedure, Part 3, Title 10, Chapter 7), and the results of such examination.

(g) If the liabilities include long term notes or mortgages, state the amount of monthly payments, name of payee, due date, and other terms and conditions, including any subordination agreement which may exist with respect thereto in the financial statements or a footnote thereto.

The following items should be taken into consideration by the accountant in preparing the financial statements and comments of a general prorater:

(a) If the licensee is engaged in other businesses, in addition to the licensed business, all assets and liabilities of other businesses must be included in the balance sheet submitted. All income and expenses of other businesses should be included in the statement of income and expenses submitted.

(b) The liability for clients' deposits not yet transmitted to creditors should be shown as a deduction from the trust bank account on the asset side of the balance sheet, rather than showing the net amount, if any, in the trust bank account.

(c) The accountant shall enumerate in detail in his/her comments, the auditing procedure employed in verifying the untransmitted clients' funds.

(e) In the event licensee has branch offices, each office shall be examined to the same extent as the main office.

(f) If the liabilities include long term notes or mortgages, state the amount of monthly payments, name of payee, due date, and other terms and conditions, including any subordination agreement which may exist with respect thereto in the financial statements or a footnote thereto.

Cal. Code Regs. Tit. 10, § 1787.1

1. New section filed 12-12-55 and amendment filed 12-21-55, as emergencies; effective upon filing (Register 55, No. 18).
2. Amendment filed 12-31-58; effective thirtieth day thereafter (Register 59, No. 11).
3. Amendment filed 12-16-68; effective thirtieth day thereafter (Register 68, No. 48).
4. Amendment filed 8-9-83; effective thirtieth day thereafter (Register 83, No. 33).
5. Change without regulatory effect amending first paragraph, Instructions heading, first and last paragraphs of Instructions, and third paragraph of subsection (c) of Audit Report and Procedures filed 1-3-92 pursuant to section 100, title 1, California Code of Regulations (Register 92, No. 12).
6. Change without regulatory effect amending first and last paragraphs of Instructions and first subparagraph (f) filed 6-26-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 26).
7. Change without regulatory effect amending title of instructions and fifth paragraph of instructions filed 8-13-2014 pursuant to section 100, title 1, California Code of Regulations (Register 2014, No. 33).

Note: Authority cited: Section 12300, Financial Code. Reference: Sections 12300.4, 12301.4 and 12304, Financial Code.