## Audit of Advances

### (i) Audit Objectives / Assertions

The auditor gathers audit evidence to satisfy the following assertions about advances:

#	Assertion
i	Advances represent amounts actually due to the bank (Existence/Occurrence)
ii	Amounts due are supported by appropriate documents (Rights & Obligations)
iii	There are no unrecorded advances (Completeness)
iv	Appropriate provisions have been made per RBI norms (Valuation)
v	Advances are disclosed per applicable policies, classified correctly, and meet statutory requirements (Presentation & Disclosure)
vi	Basis of valuation is appropriate and recoverability is considered (Valuation)
vii	Amounts in the Balance Sheet are for advances outstanding as at the B/S date (Cut-off)

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### (ii) Audit Procedures

The auditor obtains Sufficient Appropriate Audit Evidence (SAAE) by:

Study & evaluation of internal controls relating to advances and documentation.
Examining loan documentation and compliance with RBI norms.
Reviewing operation of the accounts (debit/credit patterns, utilisation).
Examining validity of recorded amounts.
Classification & provisioning review.
Examining existence, enforceability, and valuation of security.
Carrying out analytical procedures.
Sampling: Examine all large advances; examine the rest on a sampling basis.

> Special Focus – must include in review:

> - New advances sanctioned during the year.

> - Advances with adverse comments by RBI Inspection team, Concurrent Auditor, or Internal Auditor.

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### (iii) Evaluation of Internal Controls Over Advances

Key internal controls the auditor should evaluate:

1. Advance sanctioned only after credit worthiness is assessed.

2. Proper sanction from appropriate authority (within delegated powers).

3. Sufficient margin maintained against securities.

4. Necessary documents executed before disbursement (agreements, hypothecation deeds, etc.).

5. Compliance with terms of sanction and end-use of funds is ensured.

6. Drawing Power updated every month.

7. Account kept within both – drawing power and sanctioned limit.

8. Each advance reviewed at least once a year; large advances reviewed frequently.

9. Securities requiring registration must be registered in the name of the bank.

Worked example

### Example 1

Applying the Audit Objective Framework:

Scenario: The auditor finds that a ₹50 lakh term loan was disbursed but the hypothecation agreement is missing from the file.

Assertion affected: Rights & Obligations (ii) — amount due is not supported by appropriate documents.
Also affects Valuation (vi) — recoverability from security is uncertain without enforceable documentation.
Audit procedure: Report as a finding; check if security can be registered retrospectively; assess provision requirement.

### Example 2

Determining Scope of Large vs. Sample Advances:

A bank has 5,000 loan accounts. The top 50 accounts constitute 80% of the total loan portfolio.

→ Examine all 50 large accounts on a 100% basis.

→ Apply sampling to the remaining 4,950 accounts.

→ Additionally, ensure that all accounts flagged by the RBI inspection report or concurrent auditor are included in the 100% examination, regardless of size.

⚠️ Common exam mistakes

Treating the audit of advances as purely a documentation check — valuation, provisioning, and classification assertions are equally important.
Examining only the largest advances by value and ignoring accounts with adverse RBI/concurrent auditor comments — those must always be included.
Checking drawing power calculation only at year-end — the internal control requires it to be updated every month; the auditor should check the process, not just the year-end figure.
Overlooking the requirement that securities requiring registration (e.g., mortgage) must be registered in the bank's name — an unregistered security may be unenforceable.
Confusing 'adequacy of provision per RBI norms' (a specific calculation) with 'management's judgement about recoverability' — both are relevant but the RBI norm is the regulatory floor.

Reference: — SA 500 – Audit Evidence; RBI Master Circular on Prudential Norms

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Audit of Advances – Objectives, Procedures, and Internal Controls

Worked example

⚠️ Common exam mistakes