Attachment 2B Appendix 2 Exhibits 1-6.docx

Exhibit 1

INTERNAL CONTROL QUESTIONNAIRE (ICQ) FOR CHAPTER 7 TRUSTEE AUDITS

Instructions for the Trustee: Please complete and return this questionnaire to the auditor by . Commencing with the questions on page 2, a “yes” response does not require a comment (unless otherwise indicated). In general, a “yes” response means that your procedures comply with the Handbook for Chapter 7 Trustees (Handbook). Handbook references are provided when possible. Please explain all no answers. If you have not encountered the situation described, indicate how the situation will be handled if it comes up in the future. References to “trustee” refer to the chapter 7 trustee personally. The questionnaire is available electronically, upon request.

I. General Information

Name of trustee:

Address:

Telephone Number: Email Address:

Fax Number:

Date first appointed by the United States Trustee:

Currently in the case rotation? YES NO

Name of primary depository:

Name of current case management system vendor:

Names, job titles, and primary responsibilities of employees and independent contractors who assist the trustee in the chapter 7 operation:

II. System of Internal Controls

If there are no employees or independent contractors, skip this section of the ICQ.

b) Do all accounts reflect the appropriate estate tax identification number on Form 2?

Handbook Chapter 5.E.3.

Handbook Chapter 5.G.5.b.(2).

Handbook Chapter 5.B.4.

and Supplementary Materials.

Handbook Chapter 5.E.5.

Note: Prompt follow-up on NSF checks, stale-dated disbursement checks, and other reconciling items increases the likelihood that the trustee will be able to locate the payer or payee, get the service charge reversed, and otherwise rectify the problem. It also reduces the likelihood of potential defalcation.

b) If estate funds are commingled with other estate accounts, trust accounts, or any other non-estate accounts, how is the error detected and corrected:

Handbook Chapter 5.D states: Under no circumstances may funds or accounts of separate estates be aggregated or commingled. Bankruptcy-related funds may not be deposited to the trustee’s business, personal or trust account (a limited exception is discussed in Handbook Chapter 5.D.3.c)

c) If funds cannot or should not be deposited immediately upon receipt, where are they stored until they can be deposited or returned to the payer? Is the disposition of the funds resolved within 30 days of receipt or within 21 days after entry of a final order regarding the funds? Is the final disposition of the funds recorded in the cash receipts log? Handbook Chapters 5.D.3 and 5.D.4.

d) Are earnest monies and settlement proceeds handled in accordance with requirements listed in Handbook Chapter 5.D.3?

b) For non-estate funds and funds in no-asset cases, are supporting documents kept with the receipts log? Handbook Chapter 5.D.4.

Handbook Chapter 5.D.2.

Handbook Chapter 5.F.1.

Handbook Chapter 5.F.1.

Handbook Chapters 5.F.1-3 and 5.G.5.

Handbook Chapters 4.C.10, 4.J.2 and 5.F.3.

Who performs these tasks:

b) If so, is the computer equipment used primarily for the administration of chapter 7 cases? Handbook Chapter 5.G.3.b.

Handbook Chapter 5.G.3.e.

Handbook Chapter 5.G.3.e.

Handbook Chapter 5.G.5.b.

b) Is a copy of the plan stored offsite, as well as onsite, at a location known to both you and your staff? Handbook Chapter 5.G.4.

III. Asset Administration

b) If the debtor does not have insurance, the property is encumbered, and there are no estate funds available, does the trustee contact the secured creditor immediately so that the secured creditor can protect its own interest in the property? Handbook Chapter 4.C.3.f.

c) When property with value to the estate cannot be insured, does the trustee liquidate it as quickly as possible in a reasonable manner? Handbook Chapter 4.C.3.f.

Handbook Chapter 4.C.3.a.

Handbook Chapter 4.C.9.

Handbook Chapter 4.C.13.

Segregation of Duties Matrix

* These duties must be performed by the trustee. (Handbook Chapter 5.B)

Exhibit 2

Guide for Chapter 7 Trustee Auditors Examples of Supporting Documentation and Authorization for Transactions18F

RECEIPTS

1 Supporting documentation can include, but is not limited to, the items shown above. This information is presented to assist chapter 7 trustee auditors. It is not exhaustive, nor authoritative. Trustees are required to comply with the Bankruptcy Code and Rules, the Handbook for Chapter 7 Trustees, and local rules and practices.

Payments should be tied to the terms of the note/action should have been taken if the payments become delinquent.

Notice and court order as required by local rules.

DISBURSEMENTS

Payments for pre-petition wages and taxes prior to case closing should be supported by a claims register.

Authorization for payment of pre-petition wages and taxes would generally be a notice and court order as required by local rules. The trustee should have an operating order if post-petition wages and payroll taxes are being incurred. Notice and court order is generally needed to pay post-petition federal and state income taxes, subject to local rules.

OTHER TYPES OF DOCUMENTATION

TO SUPPORT ASSET ADMINISTRATION DECISIONS

Evidence of verification of liens: title report; payoff figures from secured creditors; copies of original lien documents; debtor’s payment records; motor vehicle registration; proof of lien perfection; print-out of internet search, etc.

Evidence of fair value determination: appraisal; market analysis; consultation with auctioneer, dealer, or real estate professional; blue book; print-out of internet search; homeowner’s insurance policy; tax assessor’s statement; income tax analysis, consideration of costs to sell and net equity to estate, etc.

Methods of inventorying estate property (will vary depending upon the nature of the property): debtor’s schedules (especially where all assets are individually listed); written list; auctioneer’s or liquidator’s list; debtor’s records (e.g., fixed asset ledger); video tape; audio tape; etc.

Exhibit 3 Chapter 7 Consequential Deficiencies The United States Trustee Program’s list of consequential deficiencies includes, but is not limited to:

Banking

1. Commingled funds

2. Unauthorized depository

3. Missing bank statements

4. Missing canceled checks

5. Estate funds not invested when appropriate

6. Improper or unauthorized bank account transfers or unexplained transactions on bank statements

7. Incomplete or missing bank reconciliations Receipts

1. Incoming checks not restrictively endorsed immediately upon receipt

2. Cash receipts log not maintained

3. Untimely deposits

4. Receipts not deposited

5. Sales/liquidations without notice or court order

6. No supporting documentation for receipts Record Keeping

1. Forms 1, 2, and/or 3 not prepared

2. Liquidation or abandonment omitted from Form 1

3. Asset omitted from Form 1

4. Transaction (receipt, disbursement) omitted from Form 2

5. Inaccurate payees/payers, transaction descriptions, or amounts on Form 2 Computer System

1. Passwords not utilized or changed at least quarterly

2. Computer system not adequately protected from damage, unauthorized access, or tampering

3. No routine back up procedures

Disbursements

1. Disbursements without court authorization (when required)

2. No supporting documentation

3. Blank checks not adequately controlled

4. Disbursements by counter check or money order

5. Unauthorized disbursements by cashier’s check or wire transfer (when applicable)

6. Checks not personally signed by trustee (unless exception authorized by UST or Handbook)

7. Blank checks pre-signed by trustee

8. Checks altered or contain unusual endorsement

9. Checks not written to specific payee (i.e., payable to cash or bearer)

Asset Administration

1. Scheduled and unscheduled assets not properly tracked on Form 1

2. Assets not timely investigated to determine value to estate

3. Estate assets not promptly inventoried, secured, or collected

4. Untimely asset liquidations

5. Assets were overlooked, lost, stolen, or otherwise not adequately accounted for

6. Trustee does not adequately supervise auctioneer, liquidator, collection agent, attorney, or other person hired to collect or liquidate assets

7. Assets sold to insiders or related parties

8. No system to monitor case progress on a quarterly basis Other Internal Controls

1. Trustee does not adequately supervise employees

2. Estate files significantly disorganized

3. Missing files

Exhibit 4

Guidelines for Issuing Audit Opinions

The chapter 7 trustee audit report must contain one of three possible opinions: “adequate,” “adequate, except for,” or “inadequate.” This opinion is determined by the audit firm after the audit working papers have been reviewed by the senior members of the engagement team, in accordance with generally accepted government auditing standards. Auditors should refrain from discussing the possible opinion with the trustee during the exit conference. The following guidelines are provided to help the engagement team make its decision.

If any one of the following deficiencies is found, the opinion is likely to be inadequate:

· No system to monitor case progress and numerous languishing cases

· Significant or numerous assets were not secured, were overlooked, or lost or stolen due to the trustee’s failure to act, resulting in losses to the estate beneficiaries

· No supervision or minimal supervision of employees who handle estate funds

· Commingling of estate funds with funds from different estates in the same bank account or with the trustee’s personal or business funds (except for an isolated mis-deposit to the wrong estate account which is promptly corrected)

· Failure to prepare the required records and reports (Forms 1, 2, and 3)

· Reviewer cannot verify cash balances and transactions because records are missing or there are a large number of unreconciled items

· Trustee cannot adequately explain unusual transfers or transactions shown on bank statements

· A blank check was signed by the trustee before its actual use

· Estate files and other records for an estate are inaccessible, missing or destroyed

· Internal controls are non-existent, limited, or so unreliable such that there is no assurance estate assets are safeguarded

· A signature stamp is used to sign estate checks without United States Trustee authorization, or a signature stamp is accessible to the trustee’s employees When none of these obvious deficiencies are present, the auditors must rely upon their judgment in deciding whether or not the totality of circumstances warrant an inadequate. This discretion should be exercised judiciously, but if there is any doubt or suspicion about the adequacy of the trustee’s internal controls and his or her ability to safeguard estate funds and property, the conclusion should be inadequate. Other circumstances that may warrant an inadequate include, but are not limited to:

· Many consequential, repeat deficiencies

· Numerous reporting errors combined with weak internal controls and missing supporting documentation Auditors also must also use their judgment to decide whether a trustee will receive an “adequate” or “adequate, except for” opinion. An adequate opinion is usually limited to those circumstances when internal controls are adequate and few discrepancies are noted.

The auditors should be familiar with the Program’s list of consequential deficiencies (Exhibit 3). When one or more of these deficiencies are present, strong consideration should be given to an “adequate, except for” opinion (unless an inadequate opinion is appropriate), particularly when there are several consequential deficiencies. A single, isolated consequential- type deficiency may not, however, rise to the level of “adequate, except for”.

An “adequate, except for” conclusion also is appropriate when there are numerous less consequential deficiencies. A high volume of relatively minor deficiencies is sometimes indicative of serious problems, such as a lack of trustee oversight or carelessness that may ultimately result in serious losses to the estates.

Sample Opinion Language Adequate

In our opinion, the trustee’s accounting and cash management practices and procedures were adequate for the safeguarding of bankruptcy estate funds in accordance with the Handbook for Chapter 7 Trustees. Our opinion is based on the transactions tested. Our audit was more limited than would be necessary to express an opinion on the trustee’s bankruptcy operations as a whole. However, nothing came to our attention for the transactions not tested to indicate that the trustee’s accounting and cash management practices were not adequate.

The audit findings are discussed in the following sections of this report and are listed in the Appendix IV.

Adequate, Except for In our opinion, the trustee’s accounting and cash management practices and procedures were adequate for the safeguarding of bankruptcy estate funds in accordance with the Handbook for Chapter 7 Trustees, except for:

Our opinion is based on the transactions tested. Our audit was more limited than would be necessary to express an opinion of the trustee's bankruptcy operations as a whole. However, aside from the preceding, nothing came to our attention for the transactions not tested to indicate that the trustee’s accounting and cash management practices were not adequate. The items listed above and other findings are discussed in the following sections of this report and are listed in the Appendix IV.

Inadequate In our opinion, the trustee’s accounting and cash management practices and procedures were inadequate for the safeguarding of bankruptcy estate funds in accordance with the Handbook for Chapter 7 Trustees, because:

Our opinion is based on the transactions tested. Our audit was more limited than would be necessary to express an opinion of the trustee’s bankruptcy operations as a whole. Because of the significance of the deficiencies, we cannot give assurance as to the reliability of the trustee's accounting and cash management practices for the transactions not tested. The items listed above and other findings are discussed in the following sections of this report and are listed in the Appendix IV.

Exhibit 5

U.S. DEPARTMENT OF JUSTICE

AUDIT REPORT

name

CHAPTER 7 TRUSTEE BANKRUPTCY ESTATE ADMINISTRATION

ANYTOWN, ANYSTATE UST REGION

date issued name

CHAPTER 7 TRUSTEE BANKRUPTCY ESTATE ADMINISTRATION

INTRODUCTION

Scope and Methodology

The audit was performed under an agreement with the Executive Office for United States Trustees (EOUST), in accordance with its Statement of Work. The audit was conducted in accordance with government auditing standards for performance audits, except as noted below.

· The audit report is issued to the U.S. Trustee rather than to the auditee.

· The report contains no recommendations and is issued closed.

· Findings are limited to identification of criteria and conditions.

In our opinion, these departures from government auditing standards have no adverse effect on the audit results.

The scope of the audit generally encompassed a review of the trustee’s: (1) asset administration and case progress review; (2) receipts and disbursements; (3) segregation of duties; (4) banking; (5) computer operations and file maintenance; and (6) domestic support obligations. The audit did not include a review of the trustee’s computer system as a whole. However, computer generated data was compared to other independent sources. We also tested assets and transactions that occurred during the trustee’s interim reporting period.

The audit procedures were developed by the Office of Oversight, EOUST. These procedures deal primarily with financial management of estate property and, to a lesser extent, the overall administration of cases. There are other important aspects of overall trustee performance that are not addressed in detail by this audit. These aspects of trustee performance are addressed by the United States Trustee through the trustee performance review process.

At the end of the latest interim reporting period, , the trustee reported a total of asset cases without a Trustee’s Final Report (or TFR) and of those cases had cash balances totaling $ . The trustee’s caseload was not confirmed with the Clerk of the Court. Therefore, we cannot provide assurance that all cases assigned to the trustee were accounted for in the interim report.

The cases selected for testing are listed in Appendix I. We contacted the Office of the United States Trustee on January X, 200X. All information provided by the Office was considered in planning the work to be performed during the audit.

Background

Name has served as a trustee under the U.S. Trustee program since . [He] OR [she] [is] OR [is not] currently on the U.S. Trustee’s active rotation for receiving new chapter 7 cases. At the time of our review, the trustee was conducting his/her bankruptcy-related duties from his/her [law office] OR [business office] located at .

AUDIT RESULTS

In our opinion, the trustee’s accounting and cash management practices and procedures were adequate for the safeguarding of bankruptcy estate funds in accordance with the Handbook for Chapter 7 Trustees, except for:

Our opinion is based on the transactions tested. Our audit was more limited than would be necessary to express an opinion of the trustee’s bankruptcy operations as a whole. However, aside from the preceding, nothing came to our attention for the transactions not tested to indicate that the trustee’s accounting and cash management practices were not adequate. The items listed above and other findings are discussed in the following sections of this report and are listed in Appendix IV.

Asset Administration and Case Progress Review

We reviewed the assets and cases listed on Appendix I and found that the trustee’s asset administration and case progress review procedures were in compliance with the Handbook for Chapter 7 Trustees.

or

We reviewed the assets and cases listed on Appendix I and found that the trustee’s asset administration and case progress review procedures were generally in compliance with the Handbook for Chapter 7 Trustees, except for the following:

1. The trustee’s system for reviewing case progress did not indicate the date of the trustee’s review (Handbook Chapter 4.C.13). While we were able to determine that the trustee was periodically reviewing case progress, we could not determine that the review was performed at least quarterly. The trustee stated that he will document his timely performance of the case progress review in the future.

2. In case XX-XXXXX ( ), we noted that the trustee failed to actively pursue collections for an account receivable in the amount of $ (Handbook Chapters 4.C and 5.G.1). Per discussion with the trustee, he/she believes that the account receivable is collectible. However, a demand letter was not sent as of the date of fieldwork; the case was filed on . The trustee explained that he/she plans to file suit ; however, he/she acknowledged that a letter should have been sent shortly after he/she was named trustee to the case.

3. In case XX-XXXX ( ), the following assets listed in the debtor’s schedules were not recorded on Form 1: cash, office equipment and furnishings, and inventory (Handbook Supplementary Materials). The trustee made the corrections and provided a new Form 1 during our field work. This type of weakness was reported in the prior UST Field Examination. (Bold)

Receipts and Disbursements

We reviewed receipts and disbursements and found that the related internal control, record keeping, and financial reporting requirements were in compliance with the Handbook for Chapter 7 Trustees.

or

5. In case XX-XXXXX ( ), a November 21, 2010 receipt in the amount of $10,000 for the settlement of a fraudulent conveyance action did not appear on Form 1. Additionally, no asset reference number and no Uniform Transaction Code were recorded for this receipt on Form 2. The correct asset reference number is #15. The correct UTC is 1241-000. (Handbook Supplementary Materials). The trustee acknowledged the finding.

6. Four of the receipts reviewed were not recorded on the receipts log. This type of weakness was reported in the prior UST Field Examination. (Handbook Chapter 5.D).

These receipts were received directly by the trustee at § 341(a) meetings and did not come through the mail. The trustee agreed that these receipts should have been included on the receipts log.

Segregation of Duties We reviewed the segregation of duties within the trustee’s office, including the matrix provided by the trustee (and reproduced herein at Appendix II), and found that the trustee operation was in compliance with the requirements set forth in the Handbook for Chapter 7 Trustees.

or

We reviewed the segregation of duties within the trustee’s office, including the matrix provided by the trustee (and reproduced herein at Appendix II), and found that the trustee operation was in compliance with the requirements set forth in the Handbook for Chapter 7 Trustees, except for the following:

7. Trustee Assistant #1 performed some of the duties that the trustee is required to perform per Handbook Chapter 5.B. Specifically, the assistant opened the bank statements and reviewed the statements and canceled checks for unusual items before giving them to the trustee to review. In addition, the assistant was responsible for setting up passwords and changing security access controls for the trustee’s computerized case management system. The trustee said he/she was not aware that these functions must be personally performed by the trustee.

Banking

The trustee’s internal controls and procedures relating to bank accounts were in compliance with the Handbook for Chapter 7 Trustees.

or

The trustee’s internal controls and procedures relating to bank accounts were in compliance with the Handbook for Chapter 7 Trustees, except for the following:

8. In case XX-XXXXX ( ), we noted that the December 31, 2010, bank reconciliation omitted a significant reconciling item. The $750 item cleared the bank but was not recorded on Form 2. (Handbook Chapter 5.E and Supplementary Materials). The trustee said he/she would investigate and make the appropriate corrections. Further, the trustee said that he/she would ensure that all reconciliations were complete in the future.

Computer Operations and File Maintenance

Computer operations and file maintenance were in compliance with the requirements stated in the Handbook for Chapter 7 Trustees. Access to, and use of, the software is controlled according to the computer access matrix at Appendix III.

or

Computer operations and filed maintenance were generally in compliance with the requirements stated in the Handbook for Chapter 7 Trustees, except for the following:

9. We noted that the trustee did not develop or maintain a comprehensive written business interruption plan for estate financial and administrative records and for the computer system data (Handbook Chapter 5.G.4). The trustee explained that there are ways to recover the records; however, the procedures are not documented. The trustee is currently in the process of writing a plan.

10. The Chapter 7 computer records were not backed-up daily (Handbook Chapter 5.G.3.e). The computer records were backed-up weekly and a copy was stored off-site.

Access to, and use of, the software is controlled according to the computer access list in Appendix III. However, as previously noted, the ability to set up and change passwords and other access controls is not limited to the trustee. See Finding # 7.

Other Matters

We reviewed the cases listed in Appendix I and found that the trustee’s procedures for domestic support obligations were generally in compliance with Handbook Chapter 4.K. Out of the xx cases selected for testing, xx cases had domestic support obligations.

or

We reviewed the cases listed in Appendix I and found that the trustee’s procedures for domestic support obligations were generally in compliance with Handbook Chapter 4.K, except as follows:

11. In case XX-XXXXX, the State agency’s address used in the initial domestic support obligation letter was not the address listed at the Program’s website.

12. The notices sent to State child support enforcement agencies did not contain the debtor’s full Social Security number (Handbook Chapter 4.K). The trustee explained this was an oversight and began to include the full Social Security number during field work.

Out of the xx cases selected for testing, xx cases had domestic support obligations.

Views of Responsible Officials

During our audit and particularly at the exit conference, we solicited the comments of the trustee. His/her comments have been incorporated into the appropriate sections in the body of the report.

APPENDIX I

CASE AND ASSET SAMPLES

The following cases and assets/dispositions were reviewed: