Verification of Loans and Advances | Procedure | Guidelines for Auditor

Guidelines for Auditor and procedure for verification of Loans

Loans maybe divided into two kinds. They are

  1. Secured Loans, and
  2. Unsecured Loans.
Verification of Loans and Advances - Audit Procedure

Verification of Loans and Advances – Audit Procedure

Secured loans can again be divided into two types such as-

  1. Loan against Security of Land & Buildings, and
  2. Loan against Movable Properties.

We shall now discuss the verification procedure of these kinds of loans under three heads as shown below:

1. Verification of Loans against the Security of Land and Buildings

1. If the company grants any loan against the security of land and buildings, the auditor should examine the Memorandum and Articles of Association of the entity to see whether it is empowered to lend money against land and property. The auditor should inspect the Minutes of the meeting of the Board of directors.

2. If the borrower is a limited company, the auditor should also ascertain that borrowing company has borrowed within its borrowing limits.

3. If the land or property has been mortgaged the auditor should first examine the Mortgage Deed and see whether the mortgage is properly executed in favour of his client. He should examine the title deeds relating to the property.

4. The auditor should also see that the mortgage is duly registered. If the borrower is a limited company, he should examine the certificate from the Registrar of Companies regarding the registration of charge.

5. In order to see whether there is adequate margin of security, the auditor should obtain a certificate as to the value of the property from the valuer.

6. If the loan is secured against a second mortgage, the auditor should see whether the first mortgagee has been duly informed of the second mortgage. He should also see that the first mortgagee has the title relating to the property.

7. The particulars of loan such as amount of the loan, rate of interest, date of receiving interest and the period of the loan are to be verified by the auditor.

8. Auditor must see that the interest is regularly received on the due dates. In case of overdue interest, auditor should see whether adequate provision has been made in respect of doubtful recovery.

9. The auditor should see whether the property is insured against its full value. He must also check up the last receipts of the fire insurance premium in order to see the policy is in force or not.

10. The auditor should get the loan amount confirmed by the borrowee.

2. Verification of Loan against Movable Properties

Movable properties include stock, shares, goods, insurance policy, bonds and debentures, etc. Loans are also granted against the security of these movable properties. We shall now discuss the verification procedure of this kind of loans.

1. If loan is granted against the security of company shares, debentures, etc., the auditor should obtain a list of stock and shares, which have been held as security in order to check whether they have been transferred in favour of his client.

2. The auditor should examine the valuation of securities and find out the margin between the loan and the present value of the security.

3. If the auditor finds that the margin is not adequate, he should ask his client to demand more security. The auditor should verify as to the marketability of the security. Partly paid shares should not be accepted as security. Above all, the auditor should get a written acknowledgement from the borrower regarding the amount of loan on the date of the Balance Sheet.

4. In case of loans, which have been given against the security of a Godown keeper’s Receipt, such a receipt should be examined. If the goods are lying at dock or in bonded warehouse, the auditor should see that the dock warrant or the warehouse certificate is in the name of the client. He should examine such certificate also.

5. The auditor should see that the borrower has paid the rent for the warehouse or godown. If the loan has been advanced against the goods-in-transit, Railway Receipt, Truck Receipt or Bill of Lading together with a Letter of Hypothecation, insurance policy and invoices, duly endorsed in favour of his client, should be inspected.

6. If loans are given against the security of Insurance Policy, the auditor should check the date on which the premium of the policy becomes due and should inspect the last receipt of the premium paid in order to find out whether the policy is in force or not.

7. If the premium has been paid by his client to prevent the policy from lapsing, the amount so paid should be debited to Loan Account. In such a case, the auditor should see whether it has been correctly treated in the accounts.

8. The auditor should ascertain the surrender value of the policy by writing to the insurance company and see that the loan advanced is within the surrender value. The auditor should also see that the notice of assignment of the policy has been given to the insurance company.

3. Verification of Unsecured Loans

Unsecured loans are given against the personal security of the borrower. In case of unsecured loan,

1. The auditor should make an enquiry regarding the financial position of the surety, because the value of the security depends on his financial position.

2. The auditor should see that any change in the terms of the loan is made without the permission of surety. If it is so, it will discharge the surety. Hence, the auditor should see no such change has been made in the terms of the loan. Promissory Note should be examined with a special attention to the date of maturity.

Guidelines for auditor and Procedure for Verification of Advances

Advances include prepaid expenses such as prepaid insurance premium, telephone rent, rates, etc. In case of these prepaid expenses,

1. The auditor should get a list of these items and should compare the details in the list with the entries made in the Journal as well as in the Ledger.

2. The receipt issued by the relevant authorities for the payments made towards these items also should be vouched.

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