Review of Operation of Account
The auditor should review the operation of the advance accounts. In doing so, an intelligent scrutiny of the operation of the account should be carried out to see that the limit is not generally exceeded; that the account is not becoming stagnant; that the customer is not drawing against deposits which are not free from lien; that the account is not window-dressed by running down overdrafts at the year end and again drawing further advances in the new year, etc.
The auditor should also examine whether there is a healthy turnover in the account. It should be seen that the frequency and the amounts of credits in the account are commensurate with the sanctioned limit and the nature and volume of business of the borrower. Any unusual items in the account should be carefully examined by the auditor. If the auditor’s review indicates any unhealthy trends, the account should be further examined. The auditor’s examination should also cover transactions in the post-balance sheet date period. Large transactions in major accounts particularly as at the year-end may be looked into, to identify any irregularities in these accounts. A written note/explanation may be obtained from the management as regards any major irregularities which may have a bearing on his report.
The auditor may also review the following to assess the recoverability of advances:
(a) Periodic statements submitted by the borrowers indicating the extent of compliance with terms and conditions.
(b) Latest financial statements of borrowers.
(c) Reports on inspection of security.
(d) Auditors’ reports in the case of borrowers enjoying aggregate credit limits of Rs. 10 lakh (or as approve by BOD of bank) or above for working capital from the banking system.
The auditor should satisfy himself that interest is being charged on all performing accounts regularly. He should compare the rate of interest with the agreement and the sanction and with the credit rating reports where the rate of interest is linked to credit rating. In case the interest rate is to be revised based on the changes in PLR /BPLR/ Base Rate of the bank, it needs to be ensured that the rate of interest to be charged form the borrower is suitably revised as and when there are changes in PLR/BPLR/Base Rate. Calculation of interest should be test-checked. The auditor should examine that interest not received on any account, which is a non-performing asset as per the guidelines of the RBI, has not been recognised as income. It may be noted that interest accrued but not due on advances does not form part of advances.
The penal interest in case of delayed submission of stock statements, non-creation of security overdrawn accounts etc., needs to be charged as per sanctioned terms and norms of the bank. The compliance of the same should be checked in detail by the auditors.
In the case of advances covered by guarantees of DICGC/ECGC/CGTS, in case of default the auditor should examine whether appropriate steps have been taken for lodging of claims for guarantees in accordance with the applicable procedure. The claims declined by DICGC/ECGC/CGTS should not be considered as recoverable while calculating the provisions against the respective advances.
In respect of consortium advances, the auditor should particularly examine–
(a) compliance with the limits stipulated by the consortium in lending moneys to the borrower;
(b) the bank’s monitoring of securities like stocks, etc., which are in its custody/charge; and
(c) follow-up with lead bank on pending issues.
Apart from the usual audit procedures applicable in respect of advances, the auditor should examine whether the bank has correctly classified the inter-bank participation certificates. In the case of participations on risksharing basis, the auditor should examine whether any loss has devolved on the bank as on the balance sheet date and, if so, whether adequate provision in respect of such loss has been made.