PRIDE STAR DEVELOPMENT BANK, INC.

INTERNAL CONTROL STANDARDS

The Board of Directors of Pride Star Development Bank, Inc. hereby adopts the
following internal control standards effective as of date hereof:
Proper accounting records
Maintain proper and adequate accounting records.
Keep records up-to-date.
Accounting records should contain sufficient detail to establish an audit
trail.
Tickets should bear official approval; should be initialled by originator and
by another person who checks them.
Independent balanci ng
Records posted by a person or cash held by teller or cashier should be
balanced or counted by another person.
Monthly reconciliation of general ledger balances vs. respective subsidiary
and supporting records and documentation by someone other than
bookkeeper or person handling records.
Irregular and unannounced count of tellers cash and checks and other
cash items at least twice a month by officer not connected with cash
department.
Irregular and unannounced count of vault cash including ATM cash at least
once a month by officer not connected with cash department.
Monthly reconciliation of due frombanks, cash in bank accounts (domestic
and foreign) and due from/to head office/branches by someone other than
person who handles records or posts the general ledger.
Periodic verification of securities and collaterals by someone other than the
custodian.
Periodic verification of accuracy of interest credits to deposit liabilities
accounts.
Segregation/Di vi sion of duties and responsibilities
No single officer or employee shall have complete authority and
responsibility for handling all phases of any transaction frombeginning to
end. There should always be some form of check and balance.
Physical handling of transactions should be separated from their recording
and supervision
Person handling cash does not post ledgers.
Person who posts depositors subsidiary ledgers does not post general ledger.
Lending officer does not disburse proceeds of notes, accept note payments or
post loan ledgers.
Issuance and recording segregated from signing of drafts/checks.
Checks and other cash items shall be maintained by an employee not
handling cash, provided there is adequate control in the custody and
disposition of funds.
Statements fromdepository bank are received by an employee other than the
one connected with the preparation, recording and signingof bank drafts.
Custodians of securities are not allowed to handle security transactions.
Collateral appraisal is done by an employee/officer other than the one who
approves loans.
Incoming checks and other cash items shall be recorded chronologically in a
register by an employee other than the bookkeeper before they are forwarded
for posting purposes.
Credit reports shall be obtained bysomeone other than lending officers.
Mailing of customers statements and delinquent notices shall be done by an
employee other than the one who granted the loan or the one handling the
records.
Extensive background checking of persons intended to be assigned to
handle cash and securities shall be conducted. Frequent follow-up
checking after their employment shall also be made.
Joint custody
J oint custody means that transactions shall be conducted in the presence
of and under the direct observation of a second person. Both persons shall
be equally accountable for the physical protection of the items and records
involved.
Physical protection shall be deemed established through the use of two (2)
locks or combinations on a file chest or vault compartment.
Two (2) or more persons shall be assigned to each half of the control so
that operating efficiency is not impaired if one (1) person is not immediately
available.
Persons who are related to each other within the third degree of
consanguinity or affinity shall not be made joint custodians.
The following shall be under joint custody:
Cash in vault and in ATM cash dispensers
All accountable forms
Collaterals
Securities
Documents of title and/or ownership of properties or fixed assets
Dormant or inactive deposit ledgers/EDP print-outs and corresponding
signature cards
Import documents
Trust receipts
Collection items
Duplicate keys, safe deposit spare locks and keys, and keys to unrented safe
deposit boxes
Safekeeping items
Vault door and safe combinations
Unissued specimen signature books
Correspondents and banks own telegraphic and/or electronic fund transfer
system or cable test keys currently in use
Test key fixed numbers unissued
Unissued and captured ATM cards and similar devices
Access locks and keys to on-line EDP terminals and similar devices
Access locks and keys to EDP mainframes and peripherals.
Signing authorities
Signing authorities for the different levels of officers to sign for and in
behalf of the banks shall be approved by the board of directors and the
extent of each level of authority shall be clearly defined. These signing
authorities shall include but need not be limited to the following:
Lending
Investment
Approval of expense
Various supervisory reports
Bank drafts, managers/cashiers checks, bank money orders and certificates
of time deposit
Dual control
Dual control means that the work of one (1) person is to be verified by a
second person to ensure that the transaction is properly authorized,
recorded and settled.
The routine and completion of each transaction shall involve at least two
(2) or more individuals.
Except as herein provided, the following accounts/transactions shall be
under dual control:
Cashier's/manager's checks, telegraphic transfers (TTs) and electronic fund
transfer system (EFTS) The signature of at least two (2) officers should be
required in the issuance of cashiers/managers checks and payment orders
(incoming and outgoing) of TTs and EFTS. The board of directors may,
however, prescribe a predetermined amount by which one (1) senior officer
can sign checks or payment orders, subject to appropriate control measures.
Certificates of Time Deposit The board of directors may, in its discretion,
determine the number of signatories for the issuance of certificates of time
deposit (CTDs). For this purpose, the Bank shall submit to the appropriate
department of the SES its internal control measures for the issuance of CTDs,
the minimum of which shall include the following activities:
(a) J oint custody of unissued CTD forms
(b) Accounting for all issued/cancelled CTDs
(c) Signature requirement for the issuance of CTDs
(d) Counterchecking of issued CTDs vs. tellers proofsheets/validated
slips
(e) Recording of CTD transactions
Any change in the internal control measures shall be submitted to the
appropriate department of the SES not later than thirty (30) days prior to
implementation.
Bank Drafts. The signature of two (2) authorized officers should be required in
the issuance of bank draft.
Borrowings - The signature of at least two (2) authorized officers should be
required.
All transactions giving rise to Due to or Due from accounts and all instruments
of remittances evidencing these transactions particularly those involving
substantial amounts should be approved bytwo (2) authorized officers.
Number control
Sequence number controls shall be incorporated in the accounting system
and should be used in registering notes, in issuing official checks and in
other similar situations. Bank management shall designate a person who
is detached from the banking operations involved to monitor said sequence
number controls.
The following forms, instruments and accounts should be number-
controlled:
Bank drafts
Managers and cashiers checks
Promissory notes
Savings deposit accounts
Demand deposit accounts
CTDs
Letters of credit
Collection items
Official and provisional receipts
Certificates of stocks
Loan accounts
Expense vouchers
Payment orders (incoming and outgoing ) of TTs and EFTS
Transfer requests through EFTS involving banks accounts abroad
EDP batch transmittal slips of documents
Due to/from head office/branches
Tickets
Rotation of duties
The duties of personnel handling cash, securities and bookkeeping records
shall be rotated.
Rotation assignment shall be irregular, unannounced and long enough to
permit disclosure of any irregularities or manipulations.
Tellers/cashiers shall be temporarily relieved of their duties during the
actual count of their cash accountabilities by BSP examiners or by
internal/external auditors.
Independence of the internal auditor
The by-laws shall provide for the position of internal auditor together with
the duties and responsibilities, scope and objectives of internal auditing.
The internal auditor shall report directly to the board of directors or to an
audit committee composed of directors who do not hold executive positions
in the Bank.
The internal auditor shall not install nor develop procedures, prepare
records or engage in other activities which he normally reviews or
appraises.
The internal auditor should be able to review risk management procedures,
measurement tools and assumptions.
Confirmation of accounts
At least once a year, the internal auditing staff shall confirm by direct
verification with bank clients, the following:
Balances of loans and credit accommodations of borrowers
Deposit account balances, particularly new deposit accounts, inactive or
dormant accounts and closed accounts
Outstanding balances of borrowings and other liabilities
Outstanding balances of receivables/payables
Other internal control standards
Deposit accounts
Entries to dormant account ledgers shall be verified and approved by a
designated officer. His initials shall be placed next to the entry on the
ledger sheet.
Dormant accounts shall be segregated from active account ledgers with a
separate subsidiary control.
Signature cards for dormant accounts shall be removed from active files.
All new current accounts shall be approved by a designated officer.
Signature cards and deposit ledger sheets shall be authenticated by some
form of validation. Subsequent changes shall also be validated.
Signature cards and deposit ledger sheets shall be accessible only to
authorized persons.
Deposit tickets shall be occasionally examined at irregular intervals to
determine that postings are made on the actual date deposits are received.
Checks shall be cancelled as soon as they have been paid and posted.
Reports on closed accounts and returned checks shall be prepared daily.
All current account statements shall be mailed or e-mailed or such other
electronic means direct to depositors. Undelivered statements shall be
retained by an organizational unit not responsible for demand deposit
account processing.
An officer shall be designated to attend to customers who report
differences on their statements.
Checkbooks shall be issued only against requisition forms signed by an
authorized signatory to the account.
The identity of depositors shall be clearly established.
Miscellaneous
Loan applications and related documents shall be verified to ensure their
authenticity particularly the name, residence, employment and current
reputation of the borrower.
Tellers paying checks to strangers shall obtain positive identification of the
person and the account on which the checks are drawn should be verified.
No employee shall be permitted to process transaction affecting his own
account.
Tellers and other employees having contact with customers are prohibited
from preparing deposit ticket, withdrawal slip or other forms for the
customer.
A sound recruitment policy shall be adopted.
All accountable officers and employees shall be bonded.
Internal control procedures for dormant/inacti ve accounts
Dormant or inactive accounts refers to the following:
Current or checking accounts showing no activity (deposit or withdrawals) for
a period of one (1) year.
Savings account showing no activity (deposit or withdrawals) for a period of
two (2) years.
Dormant accounts shall be reviewed and segregated at least once in
every semester.
Internal control measures:
As a matter of policy, efforts shall be exerted to prevent checking and
savings accounts from becoming dormant. When it becomes apparent
that an account is inactive, a short letter should be sent to the depositor
encouraging him to use his account. In case of checking accounts,
monthly statement of accounts shall be sent to depositors. If the
depositors cannot be located, the following steps should be undertaken:
(a) Check any significant changes or fluctuations in the depositors
account balances over a period of time with emphasis on accounts
with decreasing balances.
(b) Verify apparent reactivation entries, represented either by deposit or
withdrawal, that appears to have prevented the account from being
classified as dormant.
(c) Investigate any obvious alteration of the ledger records.
Segregated dormant accounts shall be placed under joint custody of two
(2) responsible officers/employees.
A separate ledger control for dormant accounts shall be maintained.
Signature cards for dormant accounts shall also be segregated fromactive
files and held under joint custody.
Entries to dormant account ledgers shall be verified and approved by a
designated officer. His initials shall be placed next to the entry on the
ledger sheet.
All inquiries on dormant accounts shall be coursed to one officer who
should obtain sufficient identification from the inquirer to assure that he is
entitled to the information.
A trial balance of dormant account ledgers shall be taken periodically and
balances with the general control account by an employee other than the
bookkeeper.
Dormant or inactive accounts shall be verified directly with depositors.
All transactions affecting dormant accounts shall be subject to audit by the
internal auditor.
A semestral report on deposit accounts transferred to dormant shall be
rendered to bank management.
Adopted on __11___ J une 2010.