The custody of the bank and can be
physically verified by the auditor. In case of loan
against shares, banks have to take out a periodical
statement of valuation of shares pledged to check
whether margin is still maintained.

rectified. Special attention needs to be paid to non-moving stock and obsolete machinery included in the stock statements on the basis of which the DP limit is being determined. Demat papers, physical shares, TDR, NSC, etc., are usually in the custody of the bank and can be physically verified by the auditor. In case of loan against shares, banks have to take out a periodical statement of valuation of shares pledged to check whether margin is still maintained. In case of NPA accounts, it is mandatory for the bank to obtain valuation report for all immovable properties/machinery mortgaged/hypothecated to the bank at least once in three years.

  1. Verification of Charges Due on Advances: An

auditor must at least test check the recovery of following charges which are recoverable on various advances at the rates prescribed by a bank:

  • charges for processing of loan, stamping, insurance, ;
  • interest/charges on the advance, including charges for withdrawals against effects (WAE), temporary overlimit, ; and
  • charges for late/non-submission of stock/ QIS statements, non-renewal of limits, inspection, valuation,

Certain Indicators which could lead to identify Irregular Accounts/Frauds

While an auditor is a watchdog and not a bloodhound, one needs to take extra care in the course of the audit to rule out any irregularities in the loan and advances portfolio. While verifying loans and advances, the auditor has to take cognisance of certain indicators, which may lead to detection of irregular accounts/frauds.

♦ A branch has one or two major borrowers constituting more than 50% to 75% of the total advances of that branch, for whom the branch goes out of its way to give continuous

 

overlimits or withdrawals against uncleared effects or doe^ n : pursue recovery of overdue bills or stoc-. statements are not received in time and yet : . r • er limit is continued

or account ;s r. : renewed on due date or ad hoc limits are : cleared and yet facility is continued, et.

While verit _   : OD a/c and bills a/c,

following observations are made:

  • account remains continuously overdrawn;
  • a number : cheques are bounced due to insufficient funds:
  • cheques dep sited are not honoured and returned unpaid:
  • the acc unt has been granted continuous TOL b\ the branch-for 20 to 25 days every month m re *er at times, such TOLs have beer, granted b\ the Branch Manager without having the power to do so;
  • the 12 month’s turnover in the account does n t c mmensurate with the sale and purchase sh wn in 12 monthly stock statements or the statement of accounts submitted:

the rea isati –  :   bills purchased/bills

dis-c untea t re eived on the due date and subse-uuenth* the same is cleared by debit:    m : :: .sen’s CC/OD a/c;

  • as so r. as the ao e bills are cleared, fresh bills are purchased discounted;
  • the facuur has not been renewed on the

due date an a the reason given is that the bonv .sm       t submitted the necessary

papers:

  • all overt _e CC limits, OD limits, unrealised bills. _nrea-sed interest are bundled together and the borrower is granted WCTL

\\ -• lapitai Term Loan) to avoid the account re-c rung NPA. Generally, such b:the:              ;                 indicator that the account

is hawtg problems;

  • for certain accounts, when papers are asked for, the branch is unduly slow in producing the sans r m . > s a plea that the same have been sent t s me authority and hence is una . . * at the branch or states that the same are not traceable;

m case certain accounts, the Branch Viuraaer p.eads not to put any adverse remark : me rep >rt and that he shall get it rear tied after the audit is over.

♦ While verifying monthly/quarterly stock statements

submitted, following observations are made:

  • generally stock statements are not submitted

on time;                                          ♦

  • the itemwise details of stock is not given and instead lumpsum figures are shown without quantitative details;
  • if itemwise details are given, a comparison of statements submitted over a period of time shows that the same stock is repeated over and over again with the same quantity and value;
  • there is heavy “sundry creditors” indicating unpaid stock, but the said amount has not been deducted from the stock value, before determining the DP limit of the borrower; ♦
  • the stock statement includes certain items which have actually been financed by the branch under LC limit or Packing Credit limit or some other limits;
  • there is a huge difference in the closing stock shown in the stock statement of 31st ♦ March of previous year and the audited/ unaudited accounts submitted subsequently

or better still, the borrower does not submit the stock statement of March or the same is untraceable in the branch;

  • the stock statement reflects an unusually high amount of “stock in transit” every month, which does not commensurate with the monthly purchases or the monthly turnover in the accounts;
  • though mandated, the branch has not obtained the “stock audit report”;
  • the stock audit report has adverse comments, but the branch has not taken any corrective steps or the Branch Manager states that subsequently he has visited the unit and everything is rectified and regularised;
  • the stock inspection done by the branch is superfluous and does not record the details of the stock verified-a few direct indepth

While an auditor is a watchdog and not a bloodhound,
one needs to take extra care in the course of the
audit to rule out any irregularities in the loan and
advances portfolio. While verifying loans and
advances, the auditor has to take cognisance of
certain indicators, which may lead to detection of
irregular accounts/frauds.

questions to the branch staff, who went for the concerned stock inspection, would reveal the quality of the inspection done. While verifying monthly/quarterly book debts statements submitted, following observations are made:

  • book debts due for more than 90 days are not segregated, though the same is mandated in the Sanction letter;
  • a comparison of last 10-12 month’s statement reveals that there are a number of book debts, which probably are being shown for more than 8-10 months and may be bad debts or recovered, but not deducted from the statement;

A comprehensive 10-12 months’ analysis of monthly sales, purchase and stock as shown in the stock statements, the book debts, the turnover in the accounts and the audited financial statements may reveal that the stock statements submitted every month are highly inflated.

Verification of other records at the branch

  • verification of stamping of the immovable property documents under ultra violet rays can reveal whether the document is genuine or a colour xerox copy;
  • in immovable property loans, the branch has not obtained “search report” of the property from the Registrar’s office, or the adverse comments in such report have been ignored;
  • the branch has not obtained NOC from the builder/society or such NOC has been personally brought by the borrower to the branch instead of the same being directly obtained by the branch from the builder/ society;
  • in case of loans to limited companies, details of previous charges have not been obtained or if any adverse observations have been made, the same are ignored, e.g. the report shows that the borrower has borrowed from other banks without the knowledge/ permission of the existing banker, old charges which were supposed to have been cleared have not been done indicating that old loans are still outstanding;

there is correspondence on record, which states that on the same immovable property, the borrower has obtained loans from more than one bank

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