FCA Exam Manual EM-130 Exam Quality Assurance

FCA Examination Manual
Module	General
Section	Exam Quality Assurance
Number	EM-130
Date Published	06/1994

Introduction

Quality controls over examination work products represent a fundamental element of generally accepted auditing standards and are crucial to the integrity of the examination process. The accuracy of any process involving evaluation of conditions and operations to conclude on risk in an institution is itself vulnerable to risk. This risk, referred to as examination risk, is the risk of not identifying or incorrectly diagnosing conditions that threaten the safety and soundness of the institution, which lead to errors or omissions in Reports of Examination. Examination risk can be reduced by having an effective quality assurance program.

An essential precursor to effective quality assurance is clear and appropriate delegation of examination authorities. The Office of Examination's (OE) objective is to delegate authority to the lowest practical level based on institutional risk and examiner expertise. This necessitates formal establishment of authorities at all operational levels, which is typically accomplished by OE, region, and field office directives, operating plans, or memoranda.

There are numerous levels and types of quality assurance which can be utilized to control examination risk. It is important, however, to ensure the cost of quality assurance does not exceed the expected benefits. As such, the extent of quality assurance should vary based on factors such as institutional risk, enforcement actions, possibility of litigation, and expertise of the examiner-in-charge (EIC) and examiners involved. There are three basic activities, however, which must be performed:

Supervision of the examination process;
Cross-referencing of examination products; and
Review of examination products.

Requirements and guidelines in each of the above areas are further discussed in this section. Also, OE management may provide supplemental direction as deemed necessary. It is the responsibility of each Associate Regional Director (ARD) to establish a quality assurance program which meets established requirements, ensures efficient resource use, and is best suited to that field office's organizational structure and staff experience levels.

Supervision

Supervision should occur early on and continue throughout the examination process. Various methods of supervision, such as planning conferences, workpaper review, on-site visits by the EIC's supervisor, and report drafting conferences, can be used to ensure that appropriate communication takes place among the EIC, his/her supervisor, and participating examiners. These communication tools assist the EIC in establishing appropriate examination objectives, determining the proper focus, tone, and balance of the report, and ensuring findings are accurate and adequately supported. The extent of supervision should be differentiated based on factors such as institutional risk, existing or potential enforcement actions, possibility of litigation, and the experience level of the EIC and examiners involved.

Workpaper review is an important part of supervision. Completed workpapers must be reviewed to determine whether the intended scope of the examination was carried out, adequate evidential material is contained to support the work performed, and conclusions and opinions are accurate and adequately supported. This review should occur as early in the examination process as practical, but always before examination report issuance. The EIC is responsible for the completion of workpaper review, although in some cases it may be appropriate to delegate review to other team members (for example, review of individual loan workpapers). Additionally, review of workpapers by the EIC's supervisor may be utilized as deemed appropriate. Each workpaper package must be signed and dated by the reviewer(s). To ensure efficient resource use, the depth of workpaper reviews should be based on factors such as:

Nature of the work and its relative importance to the overall examination objectives;
Extent to which the EIC was involved with the area during the examination;
Experience of the EIC and examiners who carried out the various activities and/or performed initial review of the work; and
Examination and institutional risk involved.

Cross-Referencing

The primary objective of cross-referencing is to ensure the Report of Examination is substantiated by adequate, accurate, and relevant documented evidence. Additional benefits include verifying achievement of examination objectives and ensuring supporting evidence can be easily located and reviewed.

Examiners should use sound judgment to ensure the extent of cross-referencing activities is consistent with examination risk. At a minimum, however, the following cross-referencing must be completed:

Report of Examination (including the transmittal letter) to supporting workpapers;
Leadsheets or other summary type workpapers (directly supporting Report of Examination comments and figures) to any significant underlying workpapers;
FCA Rating System Summary and Supervisory Action and Monitoring form (SAM) to the Report of Examination or supporting workpapers; and
Each examination objective in the plan to supporting workpapers which evidence completion of the objective.

Leadsheets or other summary type workpapers which do not directly support Report of Examination comments and figures may also be cross-referenced to supporting workpapers at the discretion of the EIC. Such cross-referencing is often beneficial for ensuring easy location and review of supporting evidence. Supporting workpapers should not be copied and/or maintained in the workpaper files simply for cross-referencing purposes. Examination risk is the primary criteria to consider when making a determination of the extent of underlying support that is maintained in the workpaper files.

When cross-referencing, it is important to ensure consistency between comments and figures within documents. For example, when cross-referencing a Report of Examination, it is important to ensure consistency among the transmittal letter, the body of the report, and the appendices. If a comment or figure occurs more than once, it is appropriate to cross-reference the comment or figure to another part of the report which has in turn been cross-referenced to the supporting documentation. This will commonly occur in the case of figures in an appendix or comments in a transmittal letter. Typically, an appendix would be cross-referenced to supporting workpapers, and the body of the report would then be cross-referenced to the appendix as appropriate. Likewise, comments in a transmittal letter may be cross-referenced to the body of the report, which in turn would be cross-referenced to supporting workpapers or appendices.

The EIC is responsible for ensuring cross-referencing is accurate, sufficient, and completed in a timely manner. Cross-referencing should be completed prior to review of examination products.

Review

Reviews should provide for an objective assessment of examination products to ensure examination risk is minimized and desired quality is achieved. The following discussion expands on the aspects of review previously addressed under supervision by focusing on review of the end examination products for accuracy and quality. These products include the Report of Examination (including the transmittal letter), FCA Rating System Summary, and SAM (where applicable). For each of these products, the review function must ensure:

Facts, figures, and calculations are correct;
Comments are adequately supported by the workpapers;
Comments are consistent with agency standards, directives, and regulations;
Comments and conclusions are adequately developed and stated, commensurate with the risks identified, and consistent within each document and between all documents;
POWER writing concepts are used appropriately; and
Focus, balance, tone, and clarity are appropriate.

Each ARD must establish an effective and efficient means for completing reviews, ensuring appropriate independence and objectivity and avoiding duplication of effort where possible. Due to the importance of the review function, all reviewers should possess sufficient knowledge, skills, and abilities with respect to the examination process and be familiar with agency standards. Documentation which evidences completion of reviews should be placed in either the workpaper or permanent files. Refer to Supplement 3 of this module for an example of a quality assurance review sheet.

Upon completion of required reviews, the EIC is responsible for obtaining approval for report issuance at the appropriate delegated authority level. Upon approval and immediately prior to dissemination, the EIC should review the final copy of the examination report as a last quality assurance check.

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