## Audit of Advances

### Auditor's Primary Objectives (Mnemonic: ODD UV DP)

Letter	Objective
O	Amounts in balance sheet are outstanding at the balance sheet date
D	Advances represent amounts due to the bank
D	Amounts are supported by proper loan documentation
U	No unrecorded advances exist
V	Valuation basis is appropriate and recoverability is recognised
D	Advances are disclosed per accounting policies and regulatory requirements
P	Appropriate provisions are made per RBI norms and Accounting Standards

### How to Obtain Sufficient Audit Evidence (Mnemonic: A CODER)

Letter	Procedure
A	Analytical procedures
C	Compliance with RBI norms — classification and provisioning
O	Operation review of accounts
D	Examination of loan documentation
E	Existence, enforceability, and valuation of security
R	Recorded amounts validity check

### Evaluation of Internal Controls over Advances

Key controls to evaluate:

1. Credit worthiness assessment before sanctioning — proper authority approval required.

2. Documentation: All agreements, demand promissory notes, letters of hypothecation must be executed before disbursement.

3. End-use compliance: Verify funds are used as per sanction terms.

4. Margin maintenance: Sufficient margin against securities must be maintained at regular intervals.

5. Security ownership: Shares/debentures must be transferred in the bank's name; registrable securities must be registered in the bank's name.

6. Godown inspection: Bank officers and bank inspectors must frequently inspect godowns; contents of packages test-checked at receipt.

7. Drawing Power Register: Updated monthly; entries checked by an officer.

8. Account limits: Accounts must stay within both DP and sanctioned limit.

9. Irregular accounts: Reported to controlling authority regularly.

10. Periodic review: Each advance account reviewed at least once a year; large advances reviewed more frequently.

Worked example

### Example 1

### Applying the A CODER Framework to a Sample CC Account

An auditor is examining a Cash Credit account of XYZ Ltd with sanctioned limit of ₹50 lakhs.

Step	Procedure	What to check
A	Analytical	Compare utilisation % this year vs. prior year; flag unusual spikes
C	Compliance	Verify NPA classification matches RBI IRAC norms; provisioning rates applied correctly
O	Operations	Review if account regularly exceeds DP; check if interest is being serviced
D	Documentation	Confirm hypothecation agreement is executed, stamped, and registered
E	Security	Inspect stock/debtors statements; verify insurance on hypothecated goods
R	Recorded amounts	Agree outstanding balance in sub-ledger to general ledger

Red flag: If the account has been continuously at its sanctioned limit without any credits (other than re-lending), it may warrant classification as NPA.

⚠️ Common exam mistakes

Using ODD UV DP only as a checklist without understanding each objective — examiners expect explanation of each point.
Overlooking 'unrecorded advances' — these may exist when informal credit is extended at branch level without system entries.
Failing to verify enforceability of security — a legally defective hypothecation deed renders security worthless.
Not checking end-use of funds — a borrower diverting funds to non-approved purposes is a key credit risk indicator.
Treating the annual review of advance accounts as sufficient for large advances — large accounts need more frequent review.

Reference:

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