Advances generally constitute the major part of the assets of the bank. There are large number of borrowers to whom variety of advances are granted. The audit of advances requires the major attention from the auditors.
In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence about the following:
- Amounts included in balance sheet in respect of advances which are outstanding at the date of the balance sheet.
- Advances represent amount due to the bank.
- Amounts due to the bank are appropriately supported by loan documents and other documents as applicable to the nature of advances.
- There are no unrecorded advances.
- The stated basis of valuation of advances is appropriate and properly applied and the recoverability of advances is recognised in their valuation.
- The advances are disclosed, classified and described in accordance with recognised accounting policies and practices and relevant statutory and regulatory requirements.
- Appropriate provisions towards advances have been made as per the RBI norms, Accounting Standards and generally accepted accounting practices.
The auditor can obtain sufficient and appropriate audit evidence about advances by study and evaluation of internal controls relating to advances, and by:
- Examining the validity of the recorded amounts;
- Examining loan documentation;
- Reviewing the operation of the accounts;
- Examining the existence, enforceability and valuation of the security;
- Checking compliance with RBI norms including appropriate classification and provisioning; and
- Carrying out appropriate analytical procedures.
In carrying out his substantive procedures, the auditor should examine all large advances while other advances may be examined on a sampling basis. The accounts identified to be problem accounts, however, need to be examined in detail unless the amount involved is insignificant.
Advances which are sanctioned during the year or which are adversely commented by RBI inspection team, concurrent auditors, bank’s internal inspection, etc. should generally be included in the auditor’s review.
Evaluation of Internal Controls over Advances: The auditor should examine the efficacy of various internal controls over advances to determine the nature, timing and extent of his substantive procedures. In general, the internal controls over advances should include, inter alia, the following:
- The bank should make an advance only after satisfying itself as to the credit worthiness of the borrower and after obtaining sanction from the appropriate authorities of the bank.
- All the necessary documents (e.g. agreements, demand promissory notes, letters of hypothecation, etc.) should be executed by the parties before advances are made.
- The compliance with the terms of sanction and end use of the funds should be ensured.
- Sufficient margin as specified in the sanction letter should be kept against securities taken so as to cover for any decline in the value thereof. The availability of sufficient margin needs to be ensured at regular intervals.
- If the securities taken are in the nature of shares, debentures, etc. the ownership of the same should be transferred in the name of the bank and the effective control of such securities be retained as part of documentation.
- All securities requiring registration should be registered in the name of the bank or otherwise accompanied by documents sufficient to give title to the bank.
- In the case of goods in the possession of the bank, contents of the packages should be test checked at the time of receipt. The godowns should be frequently inspected by responsible officers of the branch concerned, in addition to the inspectors of the bank.
- Drawing Power Register should be updated every month to record the value of securities hypothecated. These entries should be checked by an officer.
- The accounts should be kept within both the drawing power and the sanctioned limit.
- All the accounts which exceed the sanctioned limit or drawing power or are otherwise irregular should be brought to the notice of the controlling authority regularly.
- The operation of each advance account should be reviewed at least once a year and at more frequent intervals in the case of large advances.
