Audit Approach and Procedures
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:
a. Amounts included in balance sheet in respect of advances are outstanding at the date of the balance sheet.
b. Advances represent amount due to the bank.
c. Amounts due to the bank are appropriately supported by Loan documents and other documents as applicable to the nature of advances.
d. There are no unrecorded advances.
e. The stated basis of valuation of advances is appropriate and properly applied, and that the recoverability of advances is recognised in their valuation.
f. The advances are disclosed, classified and described in accordance with recognised accounting policies and practices and relevant statutory and regulatory requirements.
g. Appropriate provisions towards advances have been made as per the RBI norms, Accounting Standards and generally accepted accounting practices.
The auditor can obtain sufficient 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 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. The extent of sample checking would also depend on the auditor’s assessment of efficacy of internal controls. What constitutes a ‘large advance’ would need to be determined in the context of volume of operations of the branch. As a general rule, however, an advance may be considered to be a large advance if the year-end balance is in excess of Rs.2 crore or 5% of the aggregate year-end advances of the branch, whichever is less.
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 audit sample. Besides this new advances sanctioned during the year should be included on selective basis in the sample.
In nutshell, auditor at branch may keep following in mind to plan comprehensive coverage of advances.
1. Obtain top 10 exposure accounts: It may be advisable for a branch auditor to visit the branch and ask the list of top 10 accounts/ exposures along with all the details such as status and security etc before starting of the audit.
2. Obtain the list of stressed accounts (SMA2): The banks monitors stressed accounts on daily basis. The account that generally has overdue beyond 60 days or likely to slip to NPA at the quarter end is termed as stressed account (some banks may use different terminology). It is advisable to obtain such list of stressed accounts at least 15 days ahead of the closing date i.e. say stressed account list as on 15th March. This will provide the auditor a ready list of such accounts. The auditor then can scrutinise each to know whether the account has slipped or if not whether has been kept standard by unusual transaction that cannot be termed as business transaction. The RBI through its circulars has time and again been emphasising that stray credit at the quarter end need not qualify to keep account standard. We need to assess whether account is inherently weak.
If so the same may have to be downgraded. As regards the partial recovery in overdue account (qualifying the criteria for classification of an account as NPA), such account cannot be upgraded unless overdue portion is recovered in entirety. As regards subsequent credit (after the date of balance sheet), the same will not improvise the classification of an advance.
3. Obtain the list of restructured accounts: As we are aware restructured account portfolio requires separate additional provisioning. It is necessary to obtain the list of such accounts and ensure whether the restructure is as per the RBI directives.
4. Obtain the list of CDR accounts: Please ensure the compliance with the RBI guidelines in respect of CDR accounts.
5. Obtain the list of unsecured exposures above Rs. 1 Cr.: Unsecured exposure has significant impact on the bank, if slips to NPA. Many a times such accounts are reviewed in the traditional manner. These require close monitoring not only from the perspective of financial parameters of the prudential guidelines but also non-financial parameters that give signals of the possible ill health. The banking industry (especially PSUs) has faced severe damages on account non-identification of such non-financial parameters.
6. Early mortality cases: Any advance slippage to NPA within 12 months of its introduction is called early mortality case. Early mortality cases invoke penalty to the sanctioning authorities. This will have to be checked to understand the reason for such happening to avoid such cases in future and also to find out whether there are any cases classified as performing on some untenable ground to push it beyond early mortality.