Page 323 - CA Inter Audit PARAM

CA Ravi Taori

b. While verifying interest income of a mid-corporate branch of an urban centre having advances
consisting of only cash credit limits for large borrowers, it was noticed that advances of ₹ 300
crores were outstanding as on balance sheet date carrying average interest rate @8% p.a.

One articled clerk in audit team makes quick back of the envelope calculations of interest income of ₹ 24
crores on advances. However, schedule of profit & loss a/c shows interest income on advances for ₹ 10
crores. Discuss any two probable reasons for such variation.
Answer (a). Special Mention accounts (SMA) are those accounts which are resulting signs of incipient stress leading
to the possibility that borrowers may default on debt obligations. These are in the nature of warning system
to alert the banks about probable NPAs so that remedial action can be taken before accounts actually turn
NPAs. Therefore, their significance lies in the fact that proper and timely identification of SMAs can help in
preventing turning potential NPAs into actual NPAs.

(b) The probable reasons for difference in interest calculation could be due to following:

(i) Cash credit accounts, by their very nature, are running accounts and their utilization depends
upon needs of business. Further, interest on cash credit account is charged on the extent of
funds utilized by the borrower. It could be possible that all cash credit limits were not fully
utilized during the year which resulted in lower interest income.

(ii) Some large accounts may have been sanctioned during later part of the year resulting in lower
interest income on advances for whole year.

QNO— Drawing Power Vs Sanctioned Limit New Course – (M23E)
BA.09.60 Bhaskar CNO - BA.280
A Ltd. has availed Cash Credit facilities against Stock and Book Debt, Term Loan for machineries and Bank
Guarantee from Big Bank Ltd. A Ltd. furnishes stock statements and age wise list of debtors to Big Bank
Ltd. on regular basis. Concurrent Auditors of Big Bank Ltd. mentioned about wrong calculation of
Drawing Power by the Bank Branch along with sanctioned limit, and balances overdrawn due to wrong
calculation of Drawing Power (DP) in the monthly report. Explain the meaning of drawing power and
how it differs from sanctioned limit? What is to be ensured while computing Drawing Power (DP)?
Answer Meaning of Drawing Power generally addressed as “DP” is an important concept for Cash Credit (CC)
facility availed from banks and financial institutions. Drawing power is the limit up to which a firm or
company can withdraw from the working capital limit sanctioned.

Different from Sanctioned Limit: The Sanctioned limit is the total exposure that a bank can take on a
particular client for facilities like cash credit, overdraft, export packing credit, non-funded exposures etc.
On the other hand, Drawing Power refers to the amount calculated based on primary security less margin
as on a particular date.

Computation of DP: It needs to be ensured that the drawing power is calculated as per the extant
guidelines formulated by the Board of Directors of the respective bank and agreed upon by the concerned
statutory auditors. Special consideration should be given to proper reporting of sundry creditors for the
purposes of calculating drawing power.

QNO— Drawing Power Calculation New Course – (M23M)
BA.09.70 Bhaskar CNO - BA.280
In a bank, all accounts should be kept within the drawing power and the sanctioned limit. The accounts
which exceed the sanctioned limit or drawing power should be brought to the notice of the management
regularly. Analyse the following points to be considered in the computation of drawing power in case of
bank audit.
(i) Bank’s Duties
(ii) Auditor’s concern
(iii) Computation of DP

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