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QNO Advances (Internal Control) Old Course-- (N18E/M19M/M19R/SM20/SM21)
BA.17 Bhaskar CNO - BA.300
The auditor should examine the efficacy of various internal controls over advances in case of Banks to
determine the nature, timing and extent of his substantive procedures. Explain what is included in the
internal controls over advances.

OR
The auditor can obtain sufficient appropriate audit evidence about advances by study and evaluation of
internal controls relating to advances. Explain in the context of Audit of Banks.
Answer  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 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.

 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.
 The compliance with the terms of sanction and end use of funds should be ensured.
 (Maintenance of Stock, Regular Reporting, Permission for new loan)
 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 god owns 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.

 As soon as any increase or decrease takes place in the securities or their value, proper
entries should be made in the Drawing Power Book and Daily Balance Book. 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.

QNO Audit of Income (RBI Directions, Materiality, Revenue Certainty) Old Course-- (M22M)
BA.17.50 #Unique
In carrying out audit of income, the auditor is primarily concerned with obtaining reasonable assurance
that the recorded income arose from transactions, which took place during the relevant period and

pertained to the bank, there is no unrecorded income and the income is recorded at appropriate amount.
Explain the Audit Approach and Procedures regarding following points in the above context :
www.auditguru.in 10.14