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the risk management system, or efforts to verify the integrity of the system,

raise material doubts as to the system’s effectiveness, then no significant

reliance should be placed on the system and a more extensive series of tests

should be undertaken to ensure that the bank’s exposure to risk from a

particular activity can be accurately evaluated. SCOPE

MEMORANDUMThe scope memorandum is an integral

product in the risk-focused methodology as the memorandum identifies the

central objectives of the on-site examination. The scope memorandum also

ensures that the examination strategy is communicated to appropriate

examination staff. A sample scope memorandum is presented in Appendix – A. This

document is of key importance, as the scope will likely vary from examination to

examination. Examination procedures should be tailored to the characteristics

of each bank, keeping in mind its size, complexity, and risk profile.

Procedures should be completed to the degree necessary to determine whether the

bank?s management understands and adequately controls the levels and types of

risk that are assumed. In addition, the memorandum should address the banking

environment, economic conditions, and any changes that bank management fore

sees that could affect the bank?s condition. A preliminary estimate of staffing

required to perform the examination should also be prepared as part of the

scope memorandum.The key factors that should be addressed

in the scope memorandum include:Preliminary Risk AssessmentThe risks associated with the bank’s

activities should be summarized and based on a review of all available sources

of information on the bank, including but not limited to, prior examination

reports, surveillance reports, correspondence files, and audit reports. The

scope memorandum should include a preliminary assessment of the bank’s

condition and major risk areas that will be evaluated through the examination

process. Summary of the Pre-Examination MeetingThe results of the pre-examination

meeting should be summarized with particular emphasis on the meeting results

that affect examination coverage. Summary of Audit and Internal Control EnvironmentA summary of the scope and adequacy of

the audit environment should be prepared which may result in a modification of

examination procedures initially expected to be performed. Activities that

receive sufficient coverage by the bank’s audit system can be tested through

the examination process. Sufficient audit coverage could result in the

elimination of certain procedures if the audit and internal control areas are

deemed satisfactory.Summary of Examination ProceduresExamination modules have been developed

related to the significant areas reviewed during an examination. The modules

are categorized as being primary or supplemental. The primary modules must be

included in each examination. However, procedures within the primary modules

can be eliminated or enhanced based on the risk assessment or the adequacy of

the audit and internal control environment. The scope memorandum should specifically

detail the areas within each module to be emphasized during the examination

process. In addition, the use of any supplemental modules should be discussed.Summary of Loan ReviewBased on the preliminary risk assessment,

the anticipated loan coverage should be detailed in the scope memorandum. In

addition to stating the percent of commercial and commercial real estate loans

to be reviewed, the scope memorandum should also identify which speciality loan

references to the general loan module are to be completed. The memorandum

should specify activities within the general loan module to be reviewed, as

well as the depth of any speciality reviews.Job StaffingThe staffing for the examination should

be detailed. Particular emphasis should be placed on ensuring appropriate

personnel are assigned to the high risk areas identified in the bank?s risk

assessment.USE OF THE

EXAMINATION MODULESThe state-banking regulator has jointly

developed bank examination modules. This automated format was designed to

define common objectives for the review of important activities within the bank

and to assist in the documentation of examination work. It is expected that

full-scope examinations will include examiners? evaluation of six critical

areas that are necessary to determine the bank?s CAMELS rating. To evaluate

these areas, examiners must perform procedures tailored to fit the risk profile

of the bank. The seven primary examination modules are: Capital Adequacy Earnings Analysis Loan Portfolio Management Liquidity Analysis Management and Internal Control Evaluation Securities Analysis Other Assets and Liabilities There are six supplemental modules that

are available for use if any of these activities present significant risk to

the bank. The supplemental modules are: Electronic Funds Transfer Risk Assessment International Banking Credit Card Merchant Processing Mortgage Banking Electronic Banking Related Organizations In addition, there are ten Loan

References (for specialized lending areas) included in the general Loan

Portfolio Management module. The loan reference modules are: Construction and Land Development Commercial and Industrial Real Estate Residential Real Estate Lending Commercial and Industrial Loans Agricultural Lending Direct Lease Financing Floor Plan Loans Troubled Debt Restructuring Consumer and Check

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