# Verification of Bank Borrowings and Out-of-Order Account Classification

## Part A: Auditing Bank Borrowings

When a company borrows from banks (loans, overdrafts, cash credit facilities), the auditor must independently verify all balances and terms rather than relying solely on the company's records.

### Key Audit Procedures

1. Obtain independent balance confirmations from all lenders (banks/financial institutions).

2. Confirmation content should cover:

Applicable interest rates
Repayment due dates
Collateral and security interests

3. Send reminders for non-replies.

4. Reconcile balances: Compare confirmation figures with the company's ledger. Obtain reconciliations for differences and test supporting documents on a test-check basis.

5. Verify passbook: Reconcile overdraft/loan account balances with the passbook; obtain a year-end certificate from the bank confirming the balance.

6. Security and charges: Obtain confirmation of securities deposited as collateral and verify that charges are:

Correctly disclosed in the financial statements
Registered with the Registrar of Companies
Recorded in the Register of Charges

7. Verify authority to borrow: Only the Board of Directors is authorised to raise loans or borrow for a company.

8. Legal compliance — Section 180, Companies Act 2013: Confirm that the maximum borrowing limit has not been contravened.

9. Purpose and utilisation: Ascertain that the loan was raised for the stated purpose, utilised accordingly, and has not prejudicially affected the entity.

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## Part B: Out-of-Order Account Classification

"Out of Order" is a classification for cash credit/overdraft accounts — a precursor to Non-Performing Asset (NPA) status.

### When is an Account Treated as Out of Order?

Condition	Result
Outstanding balance continuously exceeds the sanctioned limit/drawing power	Out of Order
Outstanding balance < sanctioned limit/drawing power but no credits continuously for 90 days as on Balance Sheet date	Out of Order
Credits exist but are insufficient to cover interest debited during the same period	Out of Order

### Auditor's Role in Banks

Bank auditors must identify out-of-order accounts and assess whether they qualify as NPAs, as this directly affects provisioning requirements and the true picture of the loan portfolio.

Worked example

### Example 1

Case (Q33 — Bank Overdraft Reconciliation): Alfa Limited has availed a bank overdraft. The bank's balance confirmation shows ₹25,66,200, but Alfa's ledger shows ₹26,45,300 — a difference of ₹79,100.

Auditor's Action:

1. Request Alfa Limited to investigate and formally reconcile the ₹79,100 difference.

2. Test supporting documents for the reconciling items on a test-check basis.

3. Obtain a bank certificate confirming the year-end overdraft balance.

4. Verify that the overdraft was authorised by the Board of Directors.

5. Check that any charge on assets is registered with the Registrar of Companies and recorded in the Register of Charges.

6. Confirm compliance with Section 180 of the Companies Act, 2013 regarding the maximum borrowing limit.

### Example 2

Case (Q34 — Out-of-Order Classification): K Ltd. has a cash credit limit of ₹25 crores from LMN Bank. Drawing power ranges between ₹22–25 crores. Actual utilisation remained below ₹20 crores throughout the year. No deposits or other credits have been received in the last two quarters (>90 days).

Classification: The account should be treated as 'Out of Order' in LMN Bank's books.

Reasoning: Although the outstanding balance (below ₹20 crores) is less than the sanctioned limit/drawing power (₹22–25 crores), there have been no credits for more than 90 consecutive days as on the Balance Sheet date. This satisfies the second out-of-order condition. An auditor of LMN Bank must flag this account and assess its NPA provisioning implications.

⚠️ Common exam mistakes

Assuming an account is in order simply because the outstanding balance is within the sanctioned limit — the 90-day no-credit rule can trigger out-of-order classification even when the balance is within limits.
Overlooking the requirement to verify registration of charges with the Registrar of Companies when auditing bank borrowings.
Not checking Section 180 compliance for the maximum borrowing limit — this is a statutory requirement the auditor must confirm.
Treating a difference between bank confirmation and ledger as immaterial without requesting formal reconciliation and testing supporting documents.

Bare-Act text Section 180 · Companies Act, 2013 · click to expand

Section 180 of the Companies Act, 2013 places restraints on the Board of Directors regarding the maximum amount that a company can borrow. The Board cannot, except with the consent of the company by a special resolution, borrow money where the aggregate of money borrowed exceeds the paid-up capital, free reserves, and securities premium of the company.

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