Audit procedure for verification of guarantees and letter of credit
Audit procedure for verification of guarantees and letter of credit:
- These are non-fund-based limits sanctioned by the bank to the customers. Many Bankers of the view that non-fund-based limits carry more risk because these are not regularly monitored by the bank.
- The Auditor should obtain the list of guarantees and letters of credits issued during the period and verify the relevant document for the issue of the same.
- The auditor should verify whether the commission is charged for the same and recorded properly in the profit and loss account.
- The Auditor should ascertain whether guarantees invoked should be adjusted to the account of the customer.
- The auditor should obtain a list of guarantees invoked and funded by the branch but not adjusted and kept in a separate account. All the details should be furnished in the prescribed format
- While reporting these cases in LFAR, the auditor should also verify simultaneously whether after considering the above funds as part of the principal operating account, the facility is becoming NPA, if yes, the same should be reported in MOC also for income recognition, asset classification, and provisioning
- For the above issue, the auditor can refer to clause 4.2.7 (ii) of the RBI Master circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to advances bearing no RBI/2015-16/101, DBOD.No.BP.BC. 2/21.04.048/2015-16 dated July 1, 2015
- Auditor should obtain relevant data from branch and furnish the details in the prescribed format in respect of Guarantees Invoked , but not paid: Sl.No, Date of invocation ,Name of the party, Name of beneficiary, Amount, Date of recovery, Remarks.
- In case, the branch informs that there is no such case, where the guarantee is invoked but not paid, the auditor should obtain a certificate from the branch that no guarantee is pending for payment which has been invoked up to 31.3.20XX
- Auditor should obtain a list of LC/acceptances funded by branch and outstanding as on 31.3.20XX. All the details should be furnished in the prescribed format
- Auditor should refer to clause 4.2.7 (ii) of RBI Master circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to advances dated July 1,2015 for considering the funding of LC as a part of principal operative account for income recognition, asset classification and provisioning. This issue has already been commented in detail under item- Guarantees Invoked, paid but not adjusted
CA. K.Nagaraju
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