Account Statement Analysis in Bank Audit

One of the major driving force of our economy is the banking industry and contributes a large share to it. An increasing number of bank frauds and identification of banking loopholes had led to a rise in a number of regulations and guidelines by RBI on Banks as well as their auditors which they have to comply with.

One of the major and most important items in the Balance Sheet of a Bank is its Advances. Advances are the major source of revenue and the very backbone of the bank and hence Auditor needs to ascertain the genuineness and authenticity of such advances. While verifying such advances, one of the most important document and working data would be its account statement.

First, let us know what can be the major type of advance accounts in a bank

• Cash Credit
• Demand Loan
• Term Loan
• Overdraft Accounts
• Short Term Foreign/Inland Bill Discounting

Bank Statement Analysis should be performed on the basis of the account you are dealing with. In this article, we would be discussing account statement analysis in the case of Cash Credit and Term Loan Accounts as these are the advances that contribute maximum in the bank’s fund based advance portfolio.

Cash Credit Account Analysis

Cash Credit Accounts (CCA) are the advances meant for working capital purposes or day to day business operations. Therefore, primary security in this case would be the Current Assets. Drawing Power*[1] is an important factor to be considered in this type of advance.

Major items that should be ascertained from the account statements of the CC Borrowers are as follows:

• Balance Outstanding exceeds Drawing Power: Check the running balance in the account statement whether it exceeds the Drawing Power feeded in the system. If it does even a single day. Proper reasons should be specified for this by the Bank Branch Management.
• Capital Expenditure: The auditor should look for the capital expenditure incurred during the year as per the Audited Financial Statements. Now such payments if made through the CC Account without prior permission of the lender(s) would amount to diversion of funds and the same should be reported to the appropriate authority.
• Routing of Sale Proceeds: One of the major conditions in these advances is that the sales proceeds should be routed through such account or any other designated account. The cumulative sales and monthly sales shown in the stock statement and Interim FS should be cross verified with the amount of credit from the account statement for that period.
• Realization of Debtors: P is calculated on the basis of sundry debtors up to 90 days/ 180 days as per nature of the industry. Hence, the realization of such debtors should be checked from the account statements through credit from the respective customers.
• Classification of Account: Check whether the account has been classified as SMA or NPA as the case may be where payment of interest or principal or both has not been made for more than 30/60/90 days.
• Round Tripping of Funds: There is always a chance that the same funds are being used by other Group Companies(subsidiaries/ associate/ JVs). Hence, the Company round trips the CC funds through its Related Party Entities. However, no reporting for these transactions is done in the Audited Financial Results/Financial Statements.

The Borrower may also round trip the funds to show the fake credits in the account statement for satisfying the criteria of doing business through such account and be safe from the verification of the concurrent auditors, revenue auditors etc.

Therefore such transactions should be traced from the account statements and proper justification should be demanded from the bank management.

• Disclosure of RPT: The amount of transactions (debit/ credit) with the related parties (Group Companies/ Promoters/ Shareholders) appearing in the CC account statements should also be disclosed in the Interim FS and Audited Financial Statements. If the same is not the case, it should be reported by the Auditor.
• Appropriate Interest Rates: Interest rates feeded in CBS should be checked for whether it is in line with the applicable interest rates in the Sanction Letter. Further booking of interest amount should be checked in the account statement.
• Suspicious Transactions: Instances should be identified where payment has been made to the Debtors and payment has been received from the Creditors. Further, proper justification from the Bank Management should be obtained.
• Not Debiting Charges: Instances of non-debit of charges such as penalty for delay in submission of stock statements, DP charges, inspection charges etc. should be appropriately reported to the authority.

Term Loan Account Analysis

Term Loans are the advances given to the Borrower which is repaid over a set period of time. A term loan usually last between one and ten years but may last up to 30 years. It has a fixed repayment schedule. Generally, this is availed by the organizations for purchasing a fixed asset, building a plant, funding a project etc.

Two of the account statements should be obtained by the auditor for the purpose of analyzing term loan. One is the Term Loan advance account and the linked Current Account/ Escrow* Account.[2]

Major items that should be ascertained from the account statements of the Term Loan Borrowers are as follows:

• Instalment Payments: The instalment payments shall be verified as per the repayment schedule in the Term Loan Account.
• Disbursement of Funds: Instances where funds have been disbursed without adequately meeting the conditions specified in the sanction note shall be noted. Further, proper justification shall be obtained from the management.
• Utilization of Funds: Check whether funds disbursed have been utilized for the purpose specified in the Sanction Letter by ascertaining the payments made from the linked current account/ escrow account and reconciling it with the utilization certificate or statement. The same shall also be reconciled from the LIE Report.
• Promoter’s Contribution: Ascertain whether Promoter’s Contribution as per the terms specified in the sanction have been brought in by the promoters. If not, the same shall be reported by the Auditor to the authority.
• Classification of Account: Check whether the account has been classified as SMA or NPA as the case may be where payment of interest or principal or both has not been made for more than 30/60/90 days.
• Diversion of Funds: Check for the instances where payments have been made for the purpose other than those specified. For e.g. payments made to debtors using the term loan funds or payment made to Related Party( Group Company/ Sister Concern) for which no disclosures and intimations have been made. The same may amount to diversion of funds.
• Other Terms of Sanction: Check whether any other payment or receipt as per the sanction terms have been complied with or not.
• Not Debiting Charges: Instances of non-debit of charges such as inspection charges, legal charges etc. should be appropriately reported to the authority.

Note

The above items have been listed based on the advances generally availed. Terms and conditions of the sanction might differ according to the relevant circumstances and auditor will have to proceed accordingly. Further, the above items are not exhaustive and hence auditor might need to check more/ other items as the case suggests.

The author can also be reached at @vyas.udit997@gmail.com.

[1] Drawing Power (DP) defines how much the Borrower can debit the money from his Cash Credit Account.

[2] An escrow account is an account where funds are held in trust while two or more parties complete a transaction. The funds shall be disbursed to the borrower after they have fulfilled the terms and conditions of escrow agreement.