# Evaluation of IC over Advances

The auditor must examine the efficacy (effectiveness) of the various IC over advances to determine the Nature, Timing and Extent (NTE) of substantive procedures.

## Key IC Elements over Advances

### 1. Pre-Sanction Controls

Bank should make an advance only after satisfying itself as to creditworthiness of the borrower
All necessary documents should be executed by parties before advances are made

### 2. Post-Sanction Compliance

Compliance with terms of sanction and end use of funds should be ensured
Sufficient margin as specified in the sanction letter should be kept against securities so as to cover for any decline in value

### 3. Securities-Related Controls

If securities are in nature of shares, debentures, etc., ownership should be transferred in the name of the bank
All securities requiring registration should be registered in the name of the bank
In case of goods in possession of the bank, contents of packages should be test checked at time of receipt; godowns should be frequently inspected by branch officers

### 4. Operational Controls

DP Register should be updated every month to record value of securities hypothecated
Account should be kept within both DP and sanctioned limit
All accounts which exceed sanctioned limit or DP or are otherwise irregular should be brought to the notice of controlling authority regularly
Operation of each advance account should be reviewed at least once a year and at more frequent intervals for large advances

Worked example

### Example 1

Example: A borrower's account shows balance Rs. 110 lakhs against a sanctioned limit of Rs. 100 lakhs. The auditor should check whether the irregularity was reported to the controlling authority and whether it was authorised - failure to escalate is an IC weakness affecting NTE of substantive testing.

⚠️ Common exam mistakes

Forgetting that DP Register must be updated monthly
Not appreciating that securities like shares must be transferred to the bank's name, not merely pledged on paper
Skipping godown inspection / contents test-check for hypothecated goods
Treating annual review as optional - it is mandatory at least once a year, more frequent for large advances

Reference:

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Bank Audit - Evaluation of Internal Control over Advances

Worked example

⚠️ Common exam mistakes