Remember in following Sequence of how loans are processed, in the same flow auditor should do his checking
–>First banks understand Business Plan & Revenue Model
–>Then study Internal Control to check credit worthiness & sanctions
–>Then documents are obtained
–>Then security is received
–>Check legality of security
–>obtain periodic statements
–>Check unusual activities
–>Healthy turnover & trends
–>if not proper go for provisioning norms
See below detailed answer
Advances to DOT COM Companies
Business Plan & Revenue Model
(iii) Verify the business plan of the company especially where the revenue model is in place. Verify whether the company depends only on outside funding or can self generate funds.
Internal Control to Check Credit Worthiness & Sanctions
(i) Evaluate the efficacy of internal control system in general to ascertain whether an advance is made 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 must specify, among other things, the limit of borrowing, nature of security, margin to be kept, interest, terms of repayment, etc. Also see that all the necessary documents, e.g., agreements, demand promissory notes, letters of hypothecation, etc. have been executed by the parties before advances are made.
Loan Documents Relevant for Company
(ii) Examine loan documents such as certificate of commencement of business, resolution of board of directors, and resolution of shareholders.
Security in the form of Mortgage
(iv) Examine in case the security is in the form of mortgage, apart from mortgage deed (in the case of English Mortgage) or letter of intent to create mortgage (in the case of Equitable Mortgage), the evidence of registration of the charge with the Registrar of Companies.
Legal Enforceability of Security
(viii) Verify whether the advance is secured and determine whether the security is legally enforceable, i.e., whether the necessary legal formalities regarding documentation, registration, etc., have been complied with; whether the security is in the effective control of the bank; and to what extent the value of the security, assessed realistically, covers the amount outstanding in the advance.
(vii) Review periodic statements, cash flow statements, latest financial statements, etc. to assess the recoverability of advances.
(v) Review the operation of advance account to see that 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.
Healthy Turnover & Trends
(vi) 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.
(ix) Ensure that proper provisioning norms have been applied in view of non-observance of terms, coupled with irregular payment of interest and default in repayment of instalments, if any.
Thank you so much Sir 🙂