Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) Set forth below are the Instructions for
preparing the Independent Annual Audit Report required by Section
17406 of the Escrow Law.
STATE OF CALIFORNIA DEPARTMENT OF CORPORATIONS
INSTRUCTIONS FOR INDEPENDENT AUDIT PURSUANT TO THE CALIFORNIA ESCROW
LAW
(1) The Independent Annual
Audit Report shall be prepared in accordance with the provisions of Section
17406 of the Escrow Law, and as
provided in the paragraphs of this subsection. For the purpose of determining
independence, the regulations of the California State Board of Accountancy
(Chapter 1, Sections
1 through
99.1, Title 16, California Code of
Regulations) shall apply.
(2) The
following items shall be considered in preparation of the report and in
examining the financial statements included in the annual report:
(A) If the licensee is engaged in other
businesses, in addition to the escrow business, the financial statements of the
licensee shall include the assets and liabilities employed in such other
businesses and the results of the operations thereof.
(B) The income statement shall state,
separately from other salaries, the amount of salaries and bonuses paid to
officers.
(C) If the liabilities
include long term notes or mortgages, 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, shall be stated.
(D) Quoted market values, if available, shall
be stated parenthetically on the balance sheet or in a supporting schedule for
items as marketable securities, including obligations of the United States
Government, bonds of state and municipal governmental units, etc. A schedule of
all securities shall be included in the annual report.
(E) The report shall contain a statement as
to whether or not the licensee met the liquid asset and tangible net worth
requirement of Section
17210 of
the Financial Code on the balance sheet date. The report shall include:
(i) A schedule showing the computation of
both the licensee's liquidity and tangible net worth for measuring compliance
with Section
17210 of
the Financial Code.
(ii) An
itemized schedule listing each item included in the computations.
(iii) If marketable investments are included
as liquid assets, the following information must be shown: company name; market
value at balance sheet date; cost; the name of the exchange it is listed on;
and the stock symbol.
(iv) If fees
receivable are to be considered a liquid asset, a copy of the fee ledger at the
balance sheet date must be included with the report.
(F) The report shall include copies of the
trust bank account reconciliations for each location as of the balance sheet
date, including all interest bearing and dormant accounts. The report shall
contain an outstanding checklist which includes check and escrow numbers, dates
and amounts for each check and an explanation for all adjustments and
reconciling items including the date of adjustment. This explanation shall
include an affirmative statement if any reconciling items were not adjusted as
of the report date and whether or not the adjustments cause debit balances
(shortages). The outstanding checklists submitted with the audit report shall
be maintained in the confidential section of the Department of Corporations'
records.
(G) The report shall
include an escrow trial balance as at the reconciliation date.
(H) The report shall disclose if the licensee
is engaged in the business of receiving escrows for deposit or delivery of the
types of transactions specified in subdivision (c) of Section
17312 of
the Financial Code and if the licensee is engaged in the business of receiving
escrows for deposit or delivery of the types of transactions not specified
therein, or both. If applicable, the report shall include:
(i) A trial balance for the types of
transactions specified in subdivision (c) of Section
17312 of
the Financial Code and a separate trial balance for the types of transactions
not specified therein. The trial balances submitted with the audit report shall
be maintained in the confidential section of the Department of Corporations'
records.
(ii) A statement whether
or not escrow books and escrow trust accounts are maintained for those
transactions specified in subdivision (c) of Section
17312 of
the Financial Code separate from those transactions not specified
therein.
(iii) If the escrow agent
is engaged in the business of receiving escrows for deposit or delivery of the
types of transactions not specified in subdivision (c) of Section
17312 of
the Financial Code, a statement shall be made whether or not the licensee has
fidelity bond coverage as required by Section
1723 of these rules.
(iv) If the escrow agent is engaged in the
business of receiving escrows for deposit or delivery of the types of
transactions specified in subdivision (c) of Section
17312 of
the Financial Code, a statement shall be made whether or not the licensee is a
member of Escrow Agents' Fidelity Corporation as required by Section
17312 of
the Financial Code.
(3) The report shall include a statement
indicating:
(A) That the individual escrow
liability accounts and the controlling account have been reconciled to the
escrow trust account as at the balance sheet date. If debit balances exist in
the escrow liability, a full explanation of the nature and cause of the debit
balances must be included in the auditor's comments along with a full
explanation of the resolution of the item. If the debit balance has not been
resolved as of the date of the auditor's report, then the auditor shall include
a positive statement stating that the debit balance has not been resolved as of
the auditor's report date. If no debit balances were in existence at the
balance sheet date, a positive statement of this fact shall be made;
and
(B) That the escrow funds were
independently confirmed in writing by the accountant directly with the
depositories or other holders of escrow assets.
(4)
(A) The
schedule of the escrow liability as at the end of each month during the
calendar or fiscal year as reflected in the Escrow Control Account must be
included in the report.
(B) If the
audit is commenced on a date other than the calendar or fiscal year-end, the
accountant shall request cut-off bank statements on all bank accounts covering
the period from the balance sheet date to the date the audit is commenced. The
bank accounts shall be reconciled to adjusted book balances as at the cut-off
date, with particular attention given to the propriety and disposition of
reconciling items appearing in the bank reconciliations at the balance sheet
date. The report shall include and show the same information as at the cut-off
date as is required by paragraph (4) of this subsection.
(5) The opinion or report of the independent
accountant shall include a statement to the effect that the accountant has
examined the financial statements with respect to the provisions of Part 3,
Title 10, of the Code of Civil Procedure, and the results of such
examination.
(6) The accountant
shall use such additional auditing procedures and standards including extension
of the minimum escrow liability confirmation required above that is considered
necessary in verifying the escrow funds and the escrow liability. The escrow
liability shall include all escrow funds deposited into interest-bearing
accounts pursuant to Section
1737(b). The
comments shall include details of the nature and extent of all additional
auditing procedures used in this verification.
(7) The following additional audit procedures
shall be performed and the results shall be disclosed in the report:
(A) Verify the authorization and
documentation of disbursements from a selective number of escrows.
(B) Select a representative sampling of
escrows closed within 60 days prior to the commencement of the audit and
perform the following audit procedures:
(i)
Review escrow instructions, correspondence and documents in the escrow files
for authorization disbursements.
(ii) Review checks for disbursements out of
escrow.
(C) Review the
schedule of escrow liability as of the last audit for dormant files and
outstanding checks and perform the following audit procedures:
(i) Verify that funds in dormant files that
no longer are on the schedule of escrow liability were properly disbursed
according to signed instructions or according to the instructions of a court of
competent jurisdiction, were interpleaded to a court of competent jurisdiction,
or were escheated to the State of California.
(ii) Verify that the oldest dormant
outstanding checks that no longer appear on the outstanding checklist were
paid, were properly canceled back into the escrow fund, were properly canceled
and re-issued to the original payee, were properly canceled and re-issued to a
new payee according to instructions, or were escheated to the State of
California. The selection of the checks shall include those checks that were
older than six months at the last audit and no longer appear on the current
outstanding checklist. The procedures shall include the review of check
endorsements.
(8) When a licensee has branches, a statement
shall be made by the accountant that the examination included auditing of the
branches, and the address of each branch so examined shall be listed.
(9) If in the opinion of the independent
public accountant a departure from the requirements set forth in this section
is justified, upon request, the Commissioner may grant a variance upon a proper
showing of suitable alternative procedures.
(b) This section became operative March 31,
2002.
1. Amendment
filed 3-20-78; effective thirtieth day thereafter (Register 78, No. 12). For
prior history, see Register 68, No. 48.
2. Amendment filed 12-31-79
as an emergency; effective upon filing. Certificate of Compliance included
(Register 80, No. 1).
3. Repealer and new section filed 7-8-83;
effective thirtieth day thereafter (Register 83, No. 28).
4.
Editorial correction of printing error in subsections (h) and (j) (Register 91,
No. 33).
5. Editorial correction of subsection (c)(2)(B)(ii)
(Register 95, No. 12).
6. Editorial correction of printing errors in
section and audit instructions (Register 96, No. 52).
7. Repealer of
subsections (c)-(c)(4), subsection relettering, amendment of relettered
subsection (g)(1), and repealer of former subsection (h)(2)(i) and
redesignation of former subsections (h)(2)(ii)-(iii) as (g)(2)(A)-(B) filed
12-16-97; operative 1-15-98 (Register 97, No. 51).
8. Amendment of
section heading, section and NOTE filed 12-31-2001 as an emergency; operative
1-1-2002 (Register 2002, No. 1). A Certificate of Compliance must be
transmitted to OAL by 5-1-2002 or emergency language will be repealed by
operation of law on the following day.
9. New section filed
12-31-2001 as an emergency; operative 3-31-2002 (Register 2002, No. 1). A
Certificate of Compliance must be transmitted to OAL by 5-1-2002 or emergency
language will be repealed by operation of law on the following day. Text of
version effective through 3-31-2002 retained for reference.
10. New
section refiled 4-29-2002 as an emergency, including amendment of section
heading and subsection (b); operative 4-30-2002 (Register 2002, No. 18). A
Certificate of Compliance must be transmitted to OAL by 8-28-2002 or emergency
language will be repealed by operation of law on the following day. Text of
former version of section
1741.5 that was effective from
1/1/2002 until 3/31/2002 expired by its own terms on 3/31/2002.
11.
Certificate of Compliance as to 4-29-2002 order transmitted to OAL 7-9-2002 and
filed 8-20-2002 (Register 2002, No. 34).
Note: Authority cited: Section
17400,
Financial Code. Reference: Section
17406,
Financial Code.
