PSDB Internal Control Standards

8/11/2019 PSDB Internal Control Standards

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PRIDE STAR DEVELOPMENT BANK, INC.

INTERNAL CONTROL STANDARDS

The Board of Directors of Pride Star Development Bank, Inc. hereby adopts thefollowing internal control standards effective as of date hereof:

Proper accounting records

Maintain proper and adequate accounting records.

Keep records up-to-date.

Accounting records should contain sufficient detail to establish an audittrail.

Tickets should bear official approval; should be initialled by originator andby another person who checks them.

Independent balancing

Records posted by a person or cash held by teller or cashier should bebalanced or counted by another person.

Monthly reconciliation of general ledger balances vs. respective subsidiaryand supporting records and documentation by someone other thanbookkeeper or person handling records.

Irregular and unannounced count of tellers cash and checks and othercash items at least twice a month by officer not connected with cashdepartment.

Irregular and unannounced count of vault cash including ATM cash at leastonce a month by officer not connected with cash department.

Monthly reconciliation of due from banks, cash in bank accounts (domesticand foreign) and due from/to head office/branches by someone other thanperson who handles records or posts the general ledger.

Periodic verification of securities and collaterals by someone other than thecustodian.

Periodic verification of accuracy of interest credits to deposit liabilitiesaccounts.


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Segregation/Division of duties and responsibilities

No single officer or employee shall have complete authority andresponsibility for handling all phases of any transaction from beginning toend. There should always be some form of check and balance.

Physical handling of transactions should be separated from their recordingand supervision

Person handling cash does not post ledgers.

Person who posts depositors subsidiary ledgers does not post general ledger.

Lending officer does not disburse proceeds of notes, accept note payments orpost loan ledgers.

Issuance and recording segregated from signing of drafts/checks.

Checks and other cash items shall be maintained by an employee nothandling cash, provided there is adequate control in the custody anddisposition of funds.

Statements from depository bank are received by an employee other than theone connected with the preparation, recording and signing of bank drafts.

Custodians of securities are not allowed to handle security transactions.

Collateral appraisal is done by an employee/officer other than the one who

approves loans.

Incoming checks and other cash items shall be recorded chronologically in a

register by an employee other than the bookkeeper before they are forwardedfor posting purposes.

Credit reports shall be obtained by someone other than lending officers.

Mailing of customers statements and delinquent notices shall be done by anemployee other than the one who granted the loan or the one handling therecords.

Extensive background checking of persons intended to be assigned tohandle cash and securities shall be conducted. Frequent follow-upchecking after their employment shall also be made.

Joint custody

Joint custody means that transactions shall be conducted in the presence

of and under the direct observation of a second person. Both persons shallbe equally accountable for the physical protection of the items and recordsinvolved.

Physical protection shall be deemed established through the use of two (2)locks or combinations on a file chest or vault compartment.

Two (2) or more persons shall be assigned to each half of the control sothat operating efficiency is not impaired if one (1) person is not immediatelyavailable.


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Persons who are related to each other within the third degree ofconsanguinity or affinity shall not be made joint custodians.

The following shall be under joint custody:

Cash in vault and in ATM cash dispensers

All accountable forms

Collaterals

Securities

Documents of title and/or ownership of properties or fixed assets

Dormant or inactive deposit ledgers/EDP print-outs and corresponding

signature cards

Import documents

Trust receipts

Collection items Duplicate keys, safe deposit spare locks and keys, and keys to unrented safe

deposit boxes

Safekeeping items

Vault door and safe combinations

Unissued specimen signature books

Correspondents and banks own telegraphic and/or electronic fund transfersystem or cable test keys currently in use

Test key fixed numbers unissued

Unissued and captured ATM cards and similar devices

Access locks and keys to on-line EDP terminals and similar devices

Access locks and keys to EDP mainframes and peripherals.

Signing authorities

Signing authorities for the different levels of officers to sign for and inbehalf of the banks shall be approved by the board of directors and theextent of each level of authority shall be clearly defined. These signingauthorities shall include but need not be limited to the following:

Lending

Investment

Approval of expense

Various supervisory reports

Bank drafts, managers/cashiers checks, bank money orders and certificatesof time deposit

Dual contro l

Dual control means that the work of one (1) person is to be verified by asecond person to ensure that the transaction is properly authorized,recorded and settled.


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The routine and completion of each transaction shall involve at least two(2) or more individuals.

Except as herein provided, the following accounts/transactions shall beunder dual control:

Cashier's/manager's checks, telegraphic transfers (TTs) and electronic fund

transfer system (EFTS) The signature of at least two (2) officers should berequired in the issuance of cashiers/managers checks and payment orders(incoming and outgoing) of TTs and EFTS. The board of directors may,however, prescribe a predetermined amount by which one (1) senior officer

can sign checks or payment orders, subject to appropriate control measures.

Certificates of Time Deposit The board of directors may, in its discretion,

determine the number of signatories for the issuance of certificates of timedeposit (CTDs). For this purpose, the Bank shall submit to the appropriate

department of the SES its internal control measures for the issuance of CTDs,the minimum of which shall include the following activities:

(a) Joint custody of unissued CTD forms(b) Accounting for all issued/cancelled CTDs

(c) Signature requirement for the issuance of CTDs(d) Counterchecking of issued CTDs vs. tellers proofsheets/validated

slips(e) Recording of CTD transactions

Any change in the internal control measures shall be submitted to theappropriate department of the SES not later than thirty (30) days prior to

implementation.

Bank Drafts. The signature of two (2) authorized officers should be required inthe issuance of bank draft.

Borrowings - The signature of at least two (2) authorized officers should be

required.

All transactions giving rise to Due to or Due from accounts and all instruments

of remittances evidencing these transactions particularly those involving

substantial amounts should be approved by two (2) authorized officers.

Number control

Sequence number controls shall be incorporated in the accounting systemand should be used in registering notes, in issuing official checks and inother similar situations. Bank management shall designate a person whois detached from the banking operations involved to monitor said sequencenumber controls.


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The following forms, instruments and accounts should be number-controlled:

Bank drafts

Managers and cashiers checks

Promissory notes

Savings deposit accounts

Demand deposit accounts

CTDs

Letters of credit

Collection items

Official and provisional receipts

Certificates of stocks

Loan accounts

Expense vouchers Payment orders (incoming and outgoing ) of TTs and EFTS

Transfer requests through EFTS involving banks accounts abroad

EDP batch transmittal slips of documents

Due to/from head office/branches

Tickets

Rotation of duties

The duties of personnel handling cash, securities and bookkeeping recordsshall be rotated.

Rotation assignment shall be irregular, unannounced and long enough topermit disclosure of any irregularities or manipulations.

Tellers/cashiers shall be temporarily relieved of their duties during theactual count of their cash accountabilities by BSP examiners or byinternal/external auditors.

Independence of the internal audito r

The by-laws shall provide for the position of internal auditor together with

the duties and responsibilities, scope and objectives of internal auditing.

The internal auditor shall report directly to the board of directors or to anaudit committee composed of directors who do not hold executive positionsin the Bank.

The internal auditor shall not install nor develop procedures, preparerecords or engage in other activities which he normally reviews orappraises.


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The internal auditor should be able to review risk management procedures,measurement tools and assumptions.

Confirmation of accounts

At least once a year, the internal auditing staff shall confirm by directverification with bank clients, the following:

Balances of loans and credit accommodations of borrowers

Deposit account balances, particularly new deposit accounts, inactive or

dormant accounts and closed accounts

Outstanding balances of borrowings and other liabilities

Outstanding balances of receivables/payables

Other internal control standards

Deposit accounts

Entries to dormant account ledgers shall be verified and approved by adesignated officer. His initials shall be placed next to the entry on theledger sheet.

Dormant accounts shall be segregated from active account ledgers with aseparate subsidiary control.

Signature cards for dormant accounts shall be removed from active files.

All new current accounts shall be approved by a designated officer.

Signature cards and deposit ledger sheets shall be authenticated by someform of validation. Subsequent changes shall also be validated.

Signature cards and deposit ledger sheets shall be accessible only toauthorized persons.

Deposit tickets shall be occasionally examined at irregular intervals todetermine that postings are made on the actual date deposits are received.

Checks shall be cancelled as soon as they have been paid and posted.

Reports on closed accounts and returned checks shall be prepared daily.

All current account statements shall be mailed or e-mailed or such otherelectronic means direct to depositors. Undelivered statements shall beretained by an organizational unit not responsible for demand depositaccount processing.


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An officer shall be designated to attend to customers who reportdifferences on their statements.

Checkbooks shall be issued only against requisition forms signed by anauthorized signatory to the account.

The identity of depositors shall be clearly established.

Miscellaneous

Loan applications and related documents shall be verified to ensure theirauthenticity particularly the name, residence, employment and currentreputation of the borrower.

Tellers paying checks to strangers shall obtain positive identification of theperson and the account on which the checks are drawn should be verified.

No employee shall be permitted to process transaction affecting his ownaccount.

Tellers and other employees having contact with customers are prohibitedfrom preparing deposit ticket, withdrawal slip or other forms for thecustomer.

A sound recruitment policy shall be adopted.

All accountable officers and employees shall be bonded.

Internal control procedures for dormant/inactive accounts

Dormant or inactive accounts refers to the following:

Current or checking accounts showing no activity (deposit or withdrawals) for

a period of one (1) year.

Savings account showing no activity (deposit or withdrawals) for a period of

two (2) years.

Dormant accounts shall be reviewed and segregated at least once inevery semester.

Internal control measures:

As a matter of policy, efforts shall be exerted to prevent checking and

savings accounts from becoming dormant. When it becomes apparent


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that an account is inactive, a short letter should be sent to the depositorencouraging him to use his account. In case of checking accounts,

monthly statement of accounts shall be sent to depositors. If the

depositors cannot be located, the following steps should be undertaken:

(a) Check any significant changes or fluctuations in the depositorsaccount balances over a period of time with emphasis on accounts

with decreasing balances.

(b) Verify apparent reactivation entries, represented either by deposit orwithdrawal, that appears to have prevented the account from beingclassified as dormant.

(c) Investigate any obvious alteration of the ledger records.

Segregated dormant accounts shall be placed under joint custody of two(2) responsible officers/employees.

A separate ledger control for dormant accounts shall be maintained.

Signature cards for dormant accounts shall also be segregated from activefiles and held under joint custody.

Entries to dormant account ledgers shall be verified and approved by adesignated officer. His initials shall be placed next to the entry on the

ledger sheet.

All inquiries on dormant accounts shall be coursed to one officer whoshould obtain sufficient identification from the inquirer to assure that he is

entitled to the information.

A trial balance of dormant account ledgers shall be taken periodically andbalances with the general control account by an employee other than the

bookkeeper.

Dormant or inactive accounts shall be verified directly with depositors.

All transactions affecting dormant accounts shall be subject to audit by the

internal auditor.

A semestral report on deposit accounts transferred to dormant shall berendered to bank management.

Adopted on __11___ June 2010.