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 by doing KYC compliance, proper credit appraisal etc. and after obtaining sanction from the appropriate authorities of the bank. The sanction for an advance should specify, among other things, the limit of borrowing, nature of security, margin to be kept, interest, terms of repayment etc. It also needs to be ensured that the loans sanctioned are as per the Loan Policy of the bank and adhere to the regulatory (RBI) norms unless a specific exemption is taken in this regard.
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 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 a 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.
Surprise checks should be made in respect of hypothecated goods not in the physical possession 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.