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M-IC

Comptroller of the Currency Administrator of National Banks

Internal Control
Comptroller’s Handbook
January 2001

Management

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Internal Control

Table of Contents

OVERVIEW .................................................................................................. 1 BACKGROUND............................................................................................ 1 Internal Control Objectives ................................................................... 2 Regulatory Requirements ...................................................................... 3 Internal Control Components ................................................................ 5 OCC INTERNAL CONTROL SUPERVISION ........................................................ 8 SupervisoryPrinciples ........................................................................... 9 Supervisory Process and Validation ..................................................... 10 Internal Control Evaluation ................................................................. 11 BOARD AND MANAGEMENT OVERSIGHT ...................................................... 15 EXAMINATIONPROCEDURES.................................................................. 17 PLANNING THE CONTROL REVIEW ............................................................... 17 QUALITY OF INTERNAL CONTROL ................................................................ 20 OVERALL CONCLUSIONS ............................................................................ 33 APPENDIX................................................................................................. 37 A. CEO QUESTIONNAIRE – INTERNAL CONTROL AND AUDIT ........................ 37 REFERENCES .............................................................................................. 43

Comptroller’s Handbook

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Internal Control

Overview
Background
Effective internal controls are the foundation of safe and sound banking. Aproperly designed and consistently enforced system of operational and financial internal control helps a bank’s board of directors and management safeguard the bank’s resources, produce reliable financial reports, and comply with laws and regulations. Effective internal control also reduces the possibility of significant errors and irregularities and assists in their timely detection when they dooccur. A bank’s board of directors and senior management cannot delegate their responsibilities for establishing, maintaining, and operating an effective system of internal control. The board must ensure that senior management regularly verifies the integrity of the bank’s internal control. Although internal control and internal audit are closely related, they are distinct from each other.Internal control is the systems, policies, procedures, and processes effected by the board of directors, management, and other personnel to safeguard bank assets, limit or control risks, and achieve a bank’s objectives. Internal audit provides an objective, independent review of bank activities, internal controls, and management information systems to help the board and management monitor and evaluateinternal control adequacy and effectiveness. OCC examiners will assess and draw conclusions about the adequacy of a bank’s internal control during every supervisory cycle. This assessment will include validation, including some level of verification or testing, when necessary. This booklet discusses the characteristics of effective controls and will help examiners and bankers assess the quality andeffectiveness of internal control. It also describes OCC’s supervisory process for internal control reviews and the roles and responsibilities of the board of directors and management.

Comptroller’s Handbook

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Internal Control

This booklet supplements the basic guidance in the “Large Bank Supervision” and the “Community Bank Supervision” booklets of the Comptroller’s Handbook....