Large Advances
In respect of large advances, the auditor’s responsibility is as under:
Comments on adverse features considered significant and which need Management’s attention.
In the normal course of audit, the auditor would obtain from the Management a list of problem accounts and discuss the same to determine whether any such account is doubtful of recovery. On the basis of information and explanations provided by the Management, the auditor may be satisfied that certain problem accounts need not be considered doubtful of recovery and, therefore, not be provided for beyond the provision required under the guidelines for provisioning issued by the RBI. In respect of such major accounts, the auditor should give relevant details in the LFAR. The details to be given in respect of each such account should include the name of the borrower, the amount outstanding and a brief history and statement of facts. It would be desirable for the auditor to obtain the relevant explanations from the Management in writing.
As regards adverse features in large accounts, the auditor can obtain relevant information substantially from the branch LFARs and from records maintained at the head office/regional or zonal offices. Banks usually have a system of reporting to the Board on large accounts (e.g., accounts where the borrowings are of Rs 2 crores or 5% of aggregate year-end advances of the branch whichever is lower) where the adverse features have been observed, including accounts which require a review or close monitoring to ensure that they do not become sub-standard or doubtful at a later stage. Unhealthy features in such accounts include frequent over-drawing beyond sanctioned limits, non-furnishing of data relating to security, defaults in furnishing of the information relating to the security charged to the bank, non- registration of charge in the case of companies, default in the matter of various stipulations for borrowings (for example, keeping the security uninsured, accumulation of old/obsolete stocks, etc.), non-renewal of documents, defaults in complying with the repayment schedules, frequent returning of bills in bill-discounting facility, and non-observance of the covenants between the bank and the borrower which may have a significant impact on the realisability of the advance or which may cause detriment to the security charged. The auditor should review the relevant reports submitted to the Board, where available.
The auditor should indicate the name of the branch, the name of the borrower, the balance as at the year-end and the general nature of adverse features noticed during the year. In case the adverse features have been persistent over a period of time and adverse comments have been made by the previous auditor(s) on these accounts, the same should also be reported.
In case the auditor notices a trend of the adverse observations then he may suitably report them in a summarised manner. In case this adverse trend is of a significant nature the auditor will need to consider the same while reporting on the effectiveness of internal financial controls, if such reporting is applicable to the bank.