Subject: Long-Term Loans and Advances

AUDIT PROGRAM

CLIENT: ______J/AP/1

PERIOD: ______

SUBJECT: LONG-TERM LOANS AND ADVANCES

Est. Hrs. / Phase/Level /

Procedures

/ W/P Ref. / By / Comments/Explanations
AUDIT OBJECTIVES
To determine whether :
A. / Loans and advances represent all amounts that can reasonably be expected to be realized through future operations or otherwise and are properly recorded.
B. / Interest on loans and advances, if any, has been properly calculated and recorded.
C. / Loans and advances are properly described and classified, and adequate disclosure with respect to these amounts have been made.
D. / Allowances for doubtful debts are adequate.
SUBSTANTIVE PROCEDURES
1. Overall Analytical Review
1.1 / Obtain a detailed schedule of loans and advances.
1.2 / Compare current year balance with prior year and investigate major fluctuations.
2. Circularization
2.1 / Select a sample of loans receivable from the detailed trial balances for confirmation. Particularly include any identified related party without exemption.
2.2 / Have the client prepare confirmation requests. Obtain requests and prepare confirmation control. Send first requests. Retain copies.
2.3 / Follow-up on confirmation requests and send second and third requests as required.
2.4 / Upon receiving confirmation replies, update the confirmation control and file the replies as clean; clean, with gratuitous comments; and exceptions.
2.5 / Prepare confirmation summary.
2.6 / Have client reconcile exceptions (consider using Standard Reconciliation Form. Verify the clerical accuracy of the reconciliations and review for completeness. Examine support for reconciling items, (Scope/Sample:______).
2.7 / Consider covering in covering letter if the significant amounts are not confirmed.
3. Subsequent realisation and other tests
3.1 / For non-replies, RPOs (returned by post office) perform procedures in lieu of circularization.
3.2 / Have the client list subsequent cash collections for all loans over Rs.____. Trace subsequent collections to the cash receipts records. (Scope/Sample:______). Ensure that receipts are not against subsequent advances.
3.3 / Verify closing balances and movements during the period by examining critical forms and documents and ensure that all transactions are properly supported. Obtain confirmations of all significant outstanding balances.
3.4 / Scan general ledger for any unusual transactions and loans granted and recovered during the period. Select a sample of transaction from the general ledger (Scope/Sample:_____) to ensure proper compliance of the Companies policies and laws and regulations.
3.5 / Ensure employees are valid employees of the company by ensuring they are included on the latest available payroll listing.
3.6 / In respect of the `advance for expenses’ review the listing for unusual items, and investigate as appropriate. Ensure that expense advances of are supported by authorized subsequent invoices and that the services obtained relate to the period.
3.7 / In respect of the employee loans, vouch balances to the loan agreement. For each balance ensure, by review of personnel records, cash books and loan agreements, that the employee is making repayment in accordance with the loan agreement.
3.8 / Review for concentration of loans with one borrower. Consider the possibility that additional loans made to borrower are not adequately secured or loan is obtained for identifiable business purpose.
4. Terms and Conditions
4.1 / For all loans and advances, obtain loan agreements and review the adequacy of the documentation and make extracts, and ensure that they are in accordance with the Company’s policies.
4.2 / Check whether the terms and conditions of the loans are softer than those generally prevalent in the trade. If so, then inquire the reasons from the management and obtain a written representation from the management specifying the reasons for the softer terms of the loans and ensure that proper disclosure in the financial statement is made as per the requirements of the Companies Ordinance, 1984,Banking Companies Ordinance and/or other laws and regulations and relevant IAS.
4.3 / For loans/advances to directors, chief executives, managing agents and employees of the Company ensure that the loan and the terms and conditions are in agreement with the rules and regulations of the Company. Ensure that proper disclosures are made.
4.4 / Ensure compliance of section 208 and 195 of the Companies Ordinance, 1984,Banking Companies Ordinance and/or other laws and regulations and relevant IAS.
4.5 / For loans to subsidiaries, Directors and Executives scan general ledger to determine the maximum amount outstanding at any month end.
4.6 / Determine whether the amounts are of a long-term nature and are properly classified in the financial statements.
5. Bank Loans
5.1 / Select a sample of loans extended or renewed, with below market interest rates or otherwise restructured, and determine whether management has carried out a credit evaluation.
5.2 / Compare current period loan balances of portfolio to prior period balances in total and/or by subcategories (e.g., by type of loan). Note any significant changes and obtain explanations.
5.3 / Trace loan disbursements from CLR to customers account selected.
5.4 / Identify loans that have more than normal elements of risk and make detailed review thereof. The usual characteristics of such loans are:
a)  Excessive loan renewals and extensions.
b)  Absence of current financial data.
c)  Loans applicable to industries having a record of economic instability.
d)  Loan declared as OAEM, sub-standard, doubtful, loss etc. by the branch, Head Office or State Bank of Pakistan.
e)  Customer having operating losses.
f)  Customer facing legal action, cash flow problems etc.
g)  Difficulty in determining the ealizedt value of security or security not readily marketable.

Loan Evaluation

5.5 / Evaluate the quality of the advances identified above and other advances selected for detailed review by the use of evaluation forms. Ensure that the evaluation forms are comprehensively and appropriately completed to the maximum extent. Any exceptions should be explained (e.g. not required by C.R.) Test and document key ealizedtion procedures. Prepare a summary of the results of our evaluation and review of quality of credit.
5.6 / Ensure that loan evaluation forms should include –
-  Outstanding balance as of examination date (in local currency and US Dollars or other foreign currency).
-  Brief history of the borrower.
-  Independent credit rating of customers.
-  The financial strength of the borrower and a review of appropriate ratios.
-  Repayment position.
-  Economic environment and future prospects of the borrower.
-  Our familiarity with/knowledge of the borrower’s business.
-  Whether the loan is secured or unsecured and if secured adequacy (nature, value and liquidity) of collateral values and nature of charge in respect of collateral i.e. –
-  Hypothecation
-  Pledge
-  Mortgage
-  Particulars of collateral insurance coverage etc. Ensure that insurance policies are current and cover all appropriate hazards.
-  The borrower’s relationship to the company (e.g. related party).
-  Length of time the loan has been performing.
-  Comments made in regulatory reports.
-  Exceptions noted, if any.
-  Bank credit personnel’s opinion in respect of exceptions, if any, noted.
-  Our opinion as to the quality of the advance.
5.7 / Obtain loan file of the borrower and examine the advance is in line with the sanction approved locally or from the head office with particular reference to the financial data the limit on borrowing, nature of security, margin to be kept, interest, terms of repayment, insurance of goods and property, documents to be obtained, guarantees, submission of special reports such as monthly stock reports, audited accounts etc.
5.8 / Review whether the file is being actively monitored and reviewed on periodic basis by client’s management and any exceptions are appropriately dealt with.
5.9 / Discuss with bank’s credit personnel any exceptions noted in respect of customers’ credit file or quality of credit and note their opinion.
Other Tests
5.10 / Test that drawings are within limits, outstanding amounts (including mark-up) are within sanctioned limits, approval / authority for credit risk has not expired, nature and margin collateral requirements are being duly complied with, rate of interest is as agreed etc. Prepare list of exceptions.
5.11 / Where advances are secured by hypothecation of goods, examine letters of hypothecation, check the periodical statements of stock reports etc. submitted by the customer and examine whether the quantities and values shown therein seem reasonable and ensure that –
-  Stock reports are submitted by the customers periodically as of the agreed dates.
-  Goods are physically inspected by the bank’s personnel at regular intervals at the customers premises.
5.12 / In the case of advances against Trust Receipt ensure that the Trust Receipt is duly signed by the customers and that this facility is given to reputed customers.
5.13 / In case of pledge, determine whether the goods are held by the bank or are in the custody of mukkadam (third party custodian) and charge is properly registered where required.
5.14 / Review the agreement with the Mukkadam to ensure that bank is fully covered for any loss or negligence of Mukkadam.
5.15 / Scrip collateral should be verified by physical check or by confirmation from outside custodians as appropriate.
5.16 / In case of mortgage of immovable property review whether it is a registered or unregistered mortgage and determine –
-  In respect of registered mortgage, that the charge documents are with the bank.
-  In respect of unregistered mortgage that original documents in respect of property is with the bank and it is kept under lock and key and that Memo of deposit has been obtained from the title holder.
-  If borrower has good title, by reference to title deeds / title search.
-  That no encumbrance certificate is available.
-  If independent appraisal / valuation has been obtained in respect of property mortgaged to ensure fair value or NRV is accurately calculated and is adequate to cover exposures.
5.17 / As regards advances against banks own Fixed Deposit Receipts, inspect the certificates and see that they are duly discharged. Also trace the FDR to the FDR register and counter foils to ensure that these were properly issued. Ensure lien noted on FDRs and also in the FDR register.
5.18 / Loans against packing credits –
-  Select loans against packing credit for review from respective register.
-  Check the sales contract on the basis of which loan was granted.
-  Ensure that the facility enjoyed was adjusted on or before the due date.
-  Check the mark-up calculations and its recovery according to the prescribed rate.
-  In case of refinance from State Bank of Pakistan check that loan is adjusted within stipulated period.
-  Check the vouchers as to amount credited to income account (mark-up) and share of SBP in mark-up credited to suspense (liability) account.
-  Check CD account statements of selected parties, when loan is allowed to parties and adjusted.
-  Check the applications of parties for loan against packing credit.
-  Ensure that the amount of advance was within the limit.
5.19 / Loans against foreign bills –
-  Ensure that loan against foreign bills is availed by the party within limit allowed.
-  In case of re-finance from SBP, ensure that proceeds ealized before due date, are deposited with SBP within the time stipulated by the SBP.
-  Check the bill or letter of credit against which the loan is allowed.
-  Ensure that loan is ealized on the maturity of bill or letter of credit.
-  Check the calculations of mark-up.
-  Check from vouchers to ensure that mark-up is posted correctly as to amount and head of account.
-  In case of re-finance check that required mark-up of SBP is credited to relevant SBP’s account and then paid to SBP.
-  Check the recoveries of LAFB, advanced to parties – through vouchers.
-  Check the account statements of the parties, when loan is granted and adjusted.
5.20 / In respect of PAD, examine bill of lading, invoice, certificate of packing, insurance policies etc. and compare with PAD register. Also ensure that advances are within the sanctioned limit. Ascertain reasons for any delay in retirement of documents.
5.21 / Ensure that collateral whether, hypothecated, pledge or mortgaged against financing are adequately insured against fire, flood earthquake etc. as appropriate.
5.22 / Where customer is a company ensure that the charges created on company’s assets is registered with the Registrar of Joint Stock Companies within the period prescribed in the Companies Ordinance, 1984,Banking Companies Ordinance and/or other laws and regulations and relevant IAS.
5.23 / Where advances are guaranteed by third parties (Borrowers Directors guarantees are not considered valid for this purpose) examine the guarantee papers (bonds) and ensure that these are from reputable companies or individuals with adequate net-worth. Review value of security, if any, offered against guarantees.
5.24 / Automobile lease documents should be consistent with the legal opinion.
5.25 / Credit Loss Reserves –
-  Obtain schedule of the above.
-  Check the footings and arithmetical accuracy of the schedule.
-  Agree the balance with General Ledger.
-  Compare overdue advances balances with schedule for any omission in the schedule.
-  Examine basis of clients included and classified in the schedule.
-  Discuss with Loan Admin./Credit Personnel for customers being classified (doubtful, sub-standard, loss, split classification).
-  Obtain documentation showing reasons for such classifications.
5.26 / Obtain from the bank a schedule of advances classified according to Prudential Regulations (i.e. OAEM, sub-standard, doubtful, or loss). Review these and discuss the classification if we are not satisfied with the classification.
-  Review classified advances by use of loan inspection/internal auditors, H.O. and SBP or other supervisory reports.
-  Review overdue/loan delinquency (or similar) reports to ensure whether there are any clients being reflected in the report but not included in credit loss reserve data unless there are any other genuine reasons.
-  Review and evaluate securities held by the bank.
-  In case of nil or irregular repayments, examine loan file to see the effectiveness of collection procedures e.g. by examining letters written to the borrowers requesting for repayment.
-  Review the allowances for possible loan losses and evaluate its adequacy. Discuss any shortfall in provision with management.