California Code of Regulations
Title 10 - Investment
Chapter 3 - Commissioner of Financial Protection and Innovation
Subchapter 10 - Check Sellers, Bill Payers and Proraters
Article 3 - Books, Records and Examinations
Section 1787.1 - Preparation of Independent Audit Report

(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.

(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.

(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 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.