Norm Reforming Articles 1, 5, and Annex of the Standard on Internal Control and Internal Audit of General Warehouses

Resolution No. CD-SIBOIF-1088-5-DIC6-2018
Dated December 6, 2018
STANDARD REFORMING ARTICLES 1, 5, AND ANNEX OF THE STANDARD ON INTERNAL CONTROL AND INTERNAL AUDIT OF GENERAL WAREHOUSES

The Board of Directors of the Superintendence of Banks and Other Financial Institutions,

CONSIDERING

I
That on October 12, 2011, the Standard on Internal Control and Internal Audit of General Warehouses was approved, contained in Resolution No. CD-SIBOIF-697-1-OCTU12-2011, published in La Gaceta, Official Gazette, Nos. 241 and 242, on December 21 and 22, 2011.

II
That it is necessary to adapt the provisions contained in the aforementioned standard, in accordance with the new Accounting Framework applicable to General Warehouses, which is based on a combination of International Financial Reporting Standards (IFRS) and prudential regulations issued by this Superintendence.

III
That based on the authority conferred by Articles 2 and 139 of Law 734, General Warehouse Law; and Article 2, fourth paragraph, Article 3, item 13), and Article 10, item 2) of Law 316, Law of the Superintendence of Banks and Other Financial Institutions, and its reforms; contained in Law No. 974, Law of the Nicaraguan Legal Digest of the Banking and Finance Sector, published in La Gaceta, Official Gazette No. 164, on August 27, 2018, and its reforms.

In exercise of its powers,

HAS ISSUED,
The following:

Resolution No. CD-SIBOIF-1088-5-DIC6-2018
STANDARD REFORMING ARTICLES 1, 5, AND ANNEX OF THE STANDARD ON INTERNAL CONTROL AND INTERNAL AUDIT OF GENERAL WAREHOUSES

FIRST: Articles 1 and 5 of the Standard on Internal Control and Internal Audit of General Warehouses, contained in Resolution No. CD-SIBOIF-697-1-OCTU12-2011, dated October 12, 2014, published in La Gaceta, Official Gazette, Nos. 241 and 242, on December 21 and 22, 2011, are hereby amended, and shall read as follows:

“Article 1. Concepts.- For the purposes of this standard, the terms indicated in this article, whether capitalized or lowercase, singular or plural, shall have the following meanings:

a) Unplanned Activities: Special examinations not foreseen in the annual work plan that are necessary to evaluate the functioning of the internal control system and its different components. b) Planned Activities: Activities authorized by the board of directors of the general warehouse, which must be executed promptly by the Internal Audit Unit, with the objective of examining, evaluating, and monitoring the adequacy and effectiveness of internal control systems. c) Warehouse or Warehouse Company: General Warehouse, an authorized auxiliary credit institution subject to the supervision of the Superintendence. d) Audit Committee or Committee: The Audit Committee appointed by the board of directors of the warehouse company. e) Days: Calendar days, unless it is expressly stated that they refer to business days. f) Significant Events: These are events that may have a material impact on liquidity, solvency, image, among other aspects of the institution. The materiality of an event will depend on whether it has the potential to cause an important impact, whether quantitative or qualitative, on an important business line of the institution or on its operations in general. To this effect, the internal auditor must apply their best professional judgment to determine those events they consider may potentially impact the institution and require reporting due to their significant nature. g) Board of Directors: The main administrative body of the warehouse company. h) Institute of Internal Auditors: An international association dedicated to the continued professional development of the internal auditor and the internal audit profession, better known by its English acronym IIA. i) Warehouse Law: Law 734, General Warehouse Law, published in La Gaceta, Official Gazette, Numbers 201 and 202, on October 21 and 22, 2010, respectively; contained in Law No. 974, Law of the Nicaraguan Legal Digest of the Banking and Finance Sector, published in La Gaceta, Official Gazette No. 164, on August 27, 2018, and its reforms. j) General Banking Law: Law 561, General Banking Law, Non-Banking Financial Institutions and Financial Groups, published in the Official Gazette No. 232, on November 30, 2005; contained in Law No. 974, Law of the Nicaraguan Legal Digest of the Banking and Finance Sector, published in La Gaceta, Official Gazette No. 164, on August 27, 2018, and its reforms. k) Manual: Internal Audit Manual containing the policies, procedures, and audit techniques to be used to evaluate the functioning of the warehouse company's internal control system. l) Accounting Framework: Refers to the Accounting Framework for General Warehouses.

m) International Standards for the Professional Practice of Internal Auditing: Standards issued by the Institute of Internal Auditors that serve as an international reference in the matter. n) Plan: Annual work plan containing general guidelines, objectives, scope, and planned activities developed by the internal audit unit during each fiscal year. o) Internal Control System: Set of policies, procedures, and control techniques established to provide reasonable assurance in achieving adequate administrative organization and operational efficiency, reliability of reports flowing from its information systems, appropriate identification and management of risks faced in its operations and activities, and compliance with applicable legal provisions. p) Superintendence: Superintendence of Banks and Other Financial Institutions. q) Superintendent: Superintendent of Banks and Other Financial Institutions. r) Internal Audit Unit or IAU: Refers to the internal audit unit under the responsibility of an internal auditor.

Article 5. Policies and Procedures.- The policies and procedures mentioned in the previous article shall comprise, at a minimum, the following aspects:
a) Financial Aspects:

1. Cash and cash equivalents
2. Portfolio at Fair Value with Changes in Profit or Loss
3. Portfolio at Fair Value with Changes in Other Comprehensive Income
4. Portfolio at Amortized Cost
5. Accounts and Documents Receivable
6. Other Debtors
7. Property, Plant, and Equipment
8. Assets Received from Recoveries
9. Non-Current Assets Held for Sale
   10.Intangible Assets
   11.Tax Assets
   12.Other Assets
   13.Diverse Assets
   14.Asset Supplementary Accounts
   15.Financial Liabilities at Amortized Cost
   16.Tax Liabilities
   17.Deferred Taxes
   18.Payables and Provisions
   19.Subordinated Obligations and/or Convertible to Capital 20.Other Liabilities 21.Equity 22.Other Comprehensive Income 23.Contingent Accounts

24.Outer Accounts
25.Result Accounts b) Operational Aspects:

1. The issuance, administration, and settlement of deposit certificates and pledge bonds, and the safeguarding of unused title forms.
2. The administration of insurance, which the warehouse is obligated to contract by law and regulations.
3. Storage, custody, conservation, and handling of goods received in deposit.
4. Inventory of goods and coverage of pledged goods.
5. Prevention of Money Laundering, Terrorism Financing, and Financing of the Proliferation of Weapons of Mass Destruction Risks.
6. Information Technology.
7. Human Resources.
8. Compliance with internal and external provisions.
9. Budget and strategic plan.
   10.Internal and external audit.”

SECOND: The Annex of the Standard on Internal Control and Internal Audit of General Warehouses, referred to in the first section of this resolution, is hereby amended, and shall read as follows:

“ANNEX
PLANNED ACTIVITIES FOR GENERAL WAREHOUSES

The planned activities contained in the Annual Work Plan for general warehouses must include the following aspects, without prejudice to the Superintendent issuing instructions on other activities that must be included in said plan:

a) Cash and cash equivalents: Internal audit must review the operational and accounting controls in this area, specifically reviewing and determining the adequacy and validity of operations by performing the following activities:
1) Authorization levels with adequate documentation.
2) Segregation of duties.
3) Account reconciliation programs.
4) Internal control mechanisms to know the degree of their accounting application.
b) Portfolio at Fair Value with Changes in Profit or Loss: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards (NIC/IFRS), policies, and procedures, specifically verifying:
1) Correct classification of the financial instrument
2) Verification of the business model used.

3) The organizational structure to verify that there is a clear definition and delimitation of functions and responsibilities (authorization, accounting recording, and risk review or control functions must be segregated).
4) Correct measurement and valuation of financial instruments
5) Accuracy and periodicity of information.
6) Periodically evaluate the results and procedures for evaluation and classification of the portfolio.
c) Portfolio at Fair Value with Changes in Other Comprehensive Income: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards (NIC/IFRS), policies, and procedures, specifically verifying:
1) Separation of debt instrument operations, repo operations, and receivables on these investments.
2) Correct classification of the financial instrument
3) Verification of the business model used
4) Correct measurement and valuation of financial instruments
5) Accuracy and periodicity of information.
6) Periodically evaluate the results and procedures for evaluation and classification of the portfolio.
d) Portfolio at Amortized Cost: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards (NIC/IFRS) policies and procedures, the review of the effectiveness of established operational and accounting controls, specifically verifying:
1) Separation of debt instrument operations, repo operations, time deposits, credit portfolio, and receivables on these investments and the credit portfolio.
2) Correct classification of the financial instrument
3) Verification of the business model used
4) Correct measurement and valuation of financial instruments
5) Accuracy and periodicity of information.
6) Degree of compliance with current regulations for the Credit Portfolio.

7) Periodic review of credit portfolio recovery and evaluation procedures.
e) Accounts and Documents Receivable: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards, policies, and procedures. The review of the effectiveness of established operational and accounting controls, specifically verifying:
1) The organizational structure to verify that there is a clear definition and delimitation of functions and responsibilities (authorization, accounting recording, and risk review or control functions must be segregated).
2) Degree of compliance with policies, provisions, and guidelines issued by the board of directors.
3) Degree of compliance with current regulations
4) Periodic review of procedures for recovery and evaluation of accounts and documents receivable.
5) Identification and classification of accounts and documents receivable.
f) Property, Plant, and Equipment: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing policies and procedures. The review of the effectiveness of established operational and accounting controls, specifically verifying:
1) That assets registered in this account comply with applicable NIC/IFRS.
2) Knowledge of property, plant, and equipment investment policies.
3) Assess the dimension of assets, their efficiency or excess considering both the activity developed and expansion plans and strategies.
4) Know and evaluate internal control mechanisms, specifically:
i. Purchase, sales, and service contracting control mechanisms.
ii. Legal safeguard mechanisms for assets (control of registry inscriptions, litigation with third parties, etc.).
iii. Asset coverage control mechanisms through insurance policies.
iv. Physical safeguard mechanisms for assets (inventories, withdrawal control, etc.).
v. Accounting internal control mechanisms.
vi. Accounting measurement and valuation of goods.
vii. Amortizations and depreciations practiced.
viii. Results recognized in real estate operations.
g) Assets Received from Recoveries:

1) Evaluate compliance with established procedures for the awarding of assets (awarding, valuation, accounting recording, provisions, etc.).
2) Verify the existence of management criteria established for the alienation of awarded assets as the last stage of the credit recovery process.
3) Degree of compliance with regulations governing the matter.
4) Know and evaluate internal control mechanisms, specifically:
i. Service contracting control mechanisms (Appraisers, technicians, administrators, etc.).
ii. Legal safeguard mechanisms for assets (control of registry inscriptions, litigation with third parties, etc.).
iii. Asset coverage control mechanisms through insurance policies.
iv. Physical safeguard mechanisms for assets (inventories, withdrawal control, etc.).
v. Accounting internal control mechanisms.
h) Non-Current Assets Held for Sale: The internal audit responsibility in this area shall be to evaluate if the balances established in this account comply with applicable NIC/IFRS. i) Intangible Assets: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards, policies, and procedures, the review of the effectiveness of established operational and accounting controls, specifically verifying:
1) Compliance with applicable NIC/IFRS.
2) Compliance with established procedures for intangible assets (Acquisition, valuation, accounting recording)
3) Correct accounting classification.
4) Authorization levels and adequate documentation.
5) Internal control mechanisms, specifically:
i. Purchase and service contracting control mechanisms.
ii. Legal safeguard mechanisms for assets (control of registry inscriptions, litigation with third parties, etc.).
iii. Accounting internal control mechanisms.
iv. Mechanisms for evaluating the economic returns of an intangible asset.
v. Amortizations practiced and impairment losses.
vi. Mechanisms used in research and development phases for the recognition of other intangible assets.

j) Tax Assets: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards, policies, and procedures, the review of the effectiveness of established operational and accounting controls, specifically verifying:
1) Degree of compliance with the law regulating the matter.
2) Proper application of applicable NIC/IFRS.
3) Tax recovery procedures.
4) Authorization levels and adequate documentation.
5) Tax reconciliations at least once a year.
k) Other Assets: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing standards, policies, and procedures, the review of the effectiveness of established operational and accounting controls, specifically verifying:
1) Authorization levels and adequate documentation.
2) Amortization expenses and the calculation method used
3) Compliance with regulations governing the matter.
4) Correct accounting classification and proper measurement and valuation.
l) Financial Liabilities at Amortized Cost: The internal audit unit shall verify that all warehouse obligations are properly classified, in accordance with applicable standards and according to procedures and internal controls, specifically verifying:
1) The organizational structure to verify that there is a clear definition and delimitation of functions and responsibilities (authorization of loan requests and negotiation, accounting recording, and internal review or control functions must be segregated).
2) Degree of compliance with standards, policies, and provisions regulating the matter.
3) Correct accounting classification, measurement, and valuation.
4) Correct recording of obligations with financial institutions and other financing, repo operations, creditors from financial lease contracts.
5) Separation of short-term and long-term obligations and provision of corresponding interest.
6) Obligations from financial leases and interest.

m) Provisions: Internal audit shall verify:
1) The existence of uncertainties regarding the amount or maturity of provisions, other benefits, and other provisions, correct classification and accounting recording.
2) Recording of personnel provisions before the balance sheet closing, as established in NIC/IFRS concerning employee benefits.
n) Tax Liabilities: The internal audit responsibility in this area shall be to periodically evaluate compliance with tax laws and policies, the review of the effectiveness of established operational and accounting controls, as well as the correct application of the corresponding NIC/IFRS. o) Other Liabilities: The internal audit responsibility in this area shall be to periodically evaluate compliance with existing provisions, policies, and procedures, the review of the effectiveness of established operational and accounting controls. It shall also verify that all amounts owed by the Warehouse are properly registered. p) Equity: Internal audit shall periodically verify compliance with standards, policies, and procedures, as well as the review of the effectiveness of established operational and accounting controls, specifically verifying:
1) Paid-in social capital: Partners' contributions to the institution and the integration of the paid-in social capital account based on the value of subscribed and paid shares, subscribed but unpaid shares, and treasury shares.
2) Contributions to capitalize.
3) Obligations convertible to capital.
4) Equity Reserves.
5) Accumulated results and current year results.
q) Net Other Comprehensive Income (OCI): The internal audit responsibility in this area shall be to periodically evaluate compliance with standards (NIC/IFRS), policies, and procedures, as well as the review of the effectiveness of established operational and accounting controls, specifically verifying:
1) Adjustments for Revaluation of Property, Plant, and Equipment
2) Exchange differences on Financial Instruments
3) Amounts transferred to the Statement of Results
4) Other Reclassifications
5) Taxes on Gains Related to Components of Other Comprehensive Income.

r) Contingent Accounts and Outer Accounts: The internal audit responsibility shall be to periodically evaluate compliance with existing standards, policies, and procedures, the review of the effectiveness of established operational and accounting controls, specifically verifying the accounting recording of received goods, insurance contracted covering the goods, assets owned by the Warehouse, contracted guarantees, credit lines, claims, among others. s) Result Accounts: The internal audit responsibility shall be to verify that only income, expenses, and costs corresponding to the period have been accounted for, as well as compliance with existing control standards, policies, and procedures, specifically:
1) Income from Operational Services
2) Financial Income
3) Income from Exchange Effects
4) Income from Recovery of Sanitized Financial Assets
5) Increases in Fair Value of Financial Instruments with Changes in Profit or Loss
6) Gain on Sale of Investments
7) Decrease in Provision for Uncollectibles
8) Decrease in Impairment Losses on Investments
9) Decrease in Impairment of Non-Financial Assets
10) Gains from Reclassifications of Other Comprehensive Income
11) Other Income
12) Expenses for Operational Services
13) Financial Expenses
14) Expenses from Exchange Effects
15) Expenses from Monetary Adjustments
16) Expenses from Sanitization of Financial Income
17) Decreases in Fair Value of Financial Instruments with Changes in Profit or Loss
18) Loss on Sale of Investments
19) Expenses for Uncollectibility of Credit Portfolio, Accounts and Documents Receivable
20) Expenses for Constitution of Reserves for Impairment of Investments
21) Expenses for Impairment of Non-Financial Assets
22) Losses from Reclassifications of Other Comprehensive Income
23) Administrative Expenses
24) Other Expenses
25) Profit or Loss before Income Tax
26) Expenses for Income Tax
27) Result of the Fiscal Year
t) Strategic Plan: The audit unit shall verify that the warehouse's strategic plan is being followed up on and that monthly compliance with the goals set in its budget is verified. u) Substantive Areas: The audit unit shall review and evaluate the controls established to ensure adequate processes, at least on the following aspects:

1) Review of operational controls, and legal and regulatory compliance in the issuance, administration, and settlement of deposit certificates and pledge bonds.
2) Evaluation of merchandise, movable and immovable property, and employee fidelity insurance administration, including in the case of goods received in deposit, the review of the sufficiency of insured sums by location, validity of policies, and coverage of risks and locations.
3) Review of the c