How to Give a Credit Audit

Are you planning on applying for credit anytime soon? One of the best practices that finance experts will recommend is for you to first carry out a credit audit, as this will provide information as to where you stand financially. By looking over your credit reports you’ll see the same information your potential creditors will be reviewing. Seeing the information first will give you a chance to correct errors or make other moves to improve your credit score before applying.

So how can you get a free report on your credit before auditing? Free copies of your credit reports are available from the website Annual Credit Report. The three nationwide credit bureaus set up the website to offer free reports as required by law. Your free report does not include your three-digit credit score but will include directions for how to order your credit score separately.

So after getting your credit report from the above website, how do you begin with your credit audit? Read on to find out.

How do I do a Credit Audit?

Review Your Credit Score

Any audit of your credit should begin with a review of your credit score. An acceptable credit score is one of the most important requirements for being approved for credit. “Good” credit generally starts with a credit score of about 620.

Read Also: How to Read a Credit Report

That could be enough to qualify you for a bank credit card, auto loan or a home mortgage, although your interest rates will probably be higher than borrowers with higher credit scores. It’s also possible to be approved for credit with scores in the 500s. However, scores in the mid-700s and higher are considered ideal.

Check for Inaccuracies

The three credit bureaus – TransUnion, Equifax, and Experian – all issue credit reports. You should periodically check all three for errors that could be deflating your credit score. You’re entitled to three free reports every 12 months from Annual Credit Reports – one from each of the credit bureaus. Check each report for inaccurate information and write letters to the credit bureaus asking them to remove the information. Find their addresses on the credit reports.

Look for Delinquent Accounts

Review your credit reports for accounts reporting as past due. Along with your credit score, potential creditors will review how well you’re currently paying your bills. Being behind on a couple of accounts could cause you to be turned down. Make note of the delinquent accounts and make payments to bring them currently before applying for new credit.

Peruse for Charge-Offs

Look for any accounts on your reports being listed as charged-off. Creditors will close your account and list it as being charged off if you stop making payments. A charge-off is an extremely negative entry on your credit reports because it suggests that you cannot be trusted to pay your bills. Before applying for new credit, contact your old creditor and offer to pay the full amount due on the charged-off account in exchange for it being removed from your credit report. The creditor isn’t required to accept such an offer, but getting the entry off your report could improve your credit score.

Take Action on Collection Items

Items listed on your reports as collections are also very bad. These are accounts that have been charged off and sold to debt collection companies. Get the contact information from the collection company and offer to pay the debt in exchange for it being removed from your credit reports.

How do You Prepare an Audit Checklist?

1. Initial Audit Planning

All internal audit projects should begin with the team clearly understanding why the project was put on the audit plan. The following questions should be answered and approved before fieldwork begins:

• Why was the audit project approved to be on the internal audit plan?
• How does the process support the organization in achieving its goals and objectives?
• What enterprise risk(s) does the audit address?
• Was this process audited in the past, and if so, what were the results of the previous audit(s)? 
• Have there been significant changes in the process recently or since the previous audit?

2. Risk and Process Subject Matter Expertise

Performing an audit based on internal company information is helpful to assess the operating effectiveness of the process’s controls. However, for internal audit to keep pace with the business’s changing landscape and to ensure key processes and controls are also designed correctly, seeking out external expertise is increasingly becoming a best practice.

At least one of the following should be used to evaluate the design of the process audited:

• Subject Matter Expert (SME) from a Big 4 or other consulting firms
• Recent articles from WSJ.com, HBR.org, or other leading business periodicals
• Relevant blog posts from The Protiviti View, RSM’s Blog, or the IIA’s blogs

Once you have leveraged internal and external resources to identify relevant risks, you will want to build an audit program that tests for these risks.

3. COSO’S 2013 Internal Control-Integrated Framework

While used extensively for Sarbanes-Oxley (SOX) compliance purposes, internal auditors can also leverage COSO’s 2013 Internal Control-Integrated Framework to create a more comprehensive audit program. In addition to identifying and testing control activities, an Internal audit should seek to identify and test the other components of a well-controlled process.

4. Initial Document Request List

Requesting and obtaining documentation on how the process works is an obvious next step in preparing for an audit. The following requests should be made before the start of audit planning in order to gain an understanding of the process, relevant applications, and key reports:

• All policies, procedure documents, and organization charts
• Key reports used to manage the effectiveness, efficiency, and process success
• Access to key applications used in the process
• Description and listing of master data for the processes being audited, including all data fields and attributes

After gaining an understanding of the process to be audited through the initial document request, you should request access to master data for the processes being audited to analyze for trends and to aid in making detailed sampling selections.

5. Preparing for a Planning Meeting with Business Stakeholders

Before meeting with business stakeholders, an internal audit should hold an internal meeting in order to confirm a high-level understanding of the objectives of the process or department and the key steps to the process. The following steps should be performed to prepare for a planning meeting with business stakeholders:

• Outline key process steps by a narrative, flowchart, or both, highlighting information inflows, outflows, and internal control components
• Validate draft narratives and flowcharts with subject matter experts (if any)
• Create an initial pre-planning questionnaire to facilitate a pre-planning meeting with key audit customers

Preparing the questionnaire after performing the initial research sets a positive tone for the audit, and illustrates that the internal audit is informed and prepared. Once this research is completed, the internal audit should meet with their business stakeholders to confirm their understanding of the process.

6. Preparing the Audit Program

Once the internal audit has confirmed their understanding of the process and risks within the process, they will be prepared to create an audit program. An audit program should detail the following information:

• Process Objectives
• Process Risks
• Controls Mitigating Process Risks
• Control Attributes, including:
  • Is the control preventing or detecting a risk event?
  • Control frequency (e.g. daily, weekly, monthly, quarterly, etc.)
  • Does the control mitigate a fraud risk?
  • Is the control manually performed, performed by an application, or both?
  • An initial assessment of the risk event (e.g. high, medium, or low)
• Testing Procedures for Controls to be Tested During the Audit, including:
  • Inquiry, or asking how the control is performed
  • Observation, or physically seeing the control be performed
  • Inspection, or reviewing documentation evidencing the control was performed
  • Re-performance, or independently performing the control to validate outcomes

7. Audit Program and Planning Review

Audit programs, especially those for processes that have never been audited before, should have multiple levels of review and buy-in before being finalized and allowing fieldwork to begin. The following individuals should review and approve the initial audit program and internal audit planning procedures before the start of fieldwork:

• Internal Audit Manager or Senior Manager
• Chief Audit Executive
• Subject Matter Expert
• Management’s Main Point of Contact for the Audit (i.e. Audit Customer)

Internal auditors who can create and document audit programs from scratch — and do not rely on template audit programs — will be more capable and equipped to perform audits over areas not routinely audited. When internal audits can spend more of their time and resources aligned to their organization’s key objectives, internal auditors’ job satisfaction will increase because they’ll be taking on more interesting projects. The Audit Committee and C-suite may become more engaged with internal audit work in strategic areas. Perhaps most importantly, recommendations made by internal audits will have a more dramatic impact to enable positive change in their organizations.

How do You Audit Advances From Customers?

A seller may receive an advance payment before it has done anything to earn the payment. When this happens, the correct accounting is to recognize the advance as a liability, until such time as the seller fulfills its obligations under the terms of the underlying sales agreement. Two journal entries are involved. They are as follows:

1. Initial recordation. Debit the cash account and credit the customer advances (liability) account.
2. Revenue recognition. Debit the customer advances (liability) account and credit the revenue account.

It is generally best not to account for a customer advance with an automatically reversing entry since that will reverse the amount of cash in the following month – and the cash paid is still in the cash account. Instead, manually track the amount in the customer advances account each month, and manually shift amounts to revenue as goods are delivered or services provided. This may require the use of a separate step in the month-end closing procedure, to ensure that the status of each customer advance is investigated on a regular basis.

Presentation of Customer Advances

A customer advance is usually stated as a current liability on the balance sheet of the seller. However, if the seller does not expect to recognize revenue from an underlying sale transaction within one year, the liability should instead be classified as a long-term liability. Here is an example.

Green Widget Company receives $10,000 from a customer for a customized purple widget. Green Widget records the receipt with a debit of $10,000 to the cash account and a credit of $10,000 to the customer advances account. In the next month, Green delivers the custom widget and creates a new journal entry that debits the customer advances account for $10,000 and credits the revenue account for $10,000.

What is Credit Audit in Banking?

A bank audit is a formal process in which the services, systems, financial statements, and/or procedures of a bank, credit union, or other financial institution is reviewed and summarized in a report. Every financial service company has a legal requirement to undergo audits regularly in order to comply with laws and regulations, as well as industry standards.

Bank audits are performed by a kind of accounting specialist called a bank auditor. 

There are two types of audits:

• An employee of the financial institution can conduct an internal audit.
• An independent auditor under the direct guidance of a certified public accountant (CPA) can conduct an external audit. 

Bank audits serve many purposes.

Here are a few common areas and metrics that a bank audit will evaluate within a financial institution:

• Security and risk management, including operational, strategic, reputation, credit, compliance, and IT and cyber risk
• Liquidity and monetary flow
• Financial transactions, including bank wires and automated clearing house (ACH) networks
• Financial and regulatory reports
• Whether a financial institution is correctly following its own policies and/or operating in compliance with legal and best-practice standards
• Whether there is any evidence of law violations, money laundering, fraud, and any other anomalies

Above all else, the main goal of an audit is to make sure a financial institution is operating in line and above board with all industry and local regulations.

How do You Audit Cash Credit?

Checklist for Bank Audit ~ Cash Credit 

1.   Sanction letter. 

2.   Borrower & Guarantors’ profile with Photographs, ID & Address proof copy. 

3.   PAN Card copy of borrower & guarantors. 

4.   CIBIL of borrower & guarantors. 

5.   Documents should be self-attested & verified with the original. 

6.   3 years ITR of borrower & guarantors. 

7.   Proprietorship letter/ Partnership deed/ MOA/AOA (as the case may be) 

8.   Financial Statements of the firm/business/company 

9.   Proper margin & Appropriate ROI is stipulated. 

10. Pre-sanction inspection report. 

11. Post-sanction inspection report. 

12. Primary security details 

13. Check   that   stock,   creditors   &   book   debts   statements   submitted   by   the 

borrower is in prescribed format. 

14. Ensure  that  Debtors  are  classified  age-wise  &  only  below  90  days  (in  most 

cases) debtors are allowed for DP purpose. 

15. Check that drawing power is calculated correctly. 
16. CA certified debtors statements/QIS are obtained quarterly/half-yearly (as the 

case) 

17. Verify Stock, Creditors & Book Debts statements from financial statements. 

18. Hypothecation agreement of stock 

19. Ensure   that stock/book debts   statements   are   submitted   timely   by   the 

borrower. Otherwise charge penal interest on daily o/s balance. 

20. Collateral security details 

21. Valuation Report (not more than 3 years old) 

22. Legal Opinion 

23. Search report 

24. Creation of EM 

25. CERSAI of collateral securities 

26. Check  that  primary  security  (stock)  &  collateral  security  (buildings  etc)  is 

adequately insured with bank clause. 

27. Check that inspections are carried out at periodic intervals & the inspection report 

is on record. 

28. PPC, Documentation charges & Inspection charges. 

29. Annual Review Charges are taken, even if review is due. 

30. Extension of limit permitted is as per the guidelines. 

31. Check that party is utilizing the limit. (otherwise commitment charges) 

32. Turnover in the account. 

33. Position of the stock audit. (If applicable) 

34. If  account  is  running  overlimit  for  more  than  90  days,  ensure  that  account  is 

treated as NPA. 

35. If review due/stock statements not submitted by the borrower for more than 

180 days, ensure that account is treated as NPA. 

36. Other sanction terms as stated in the sanction letter.

What Are The Five Process Steps to an Audit?

Internal audit conducts assurance audits through a five-phase process which includes selection, planning, conducting fieldwork, reporting results, and following up on corrective action plans.

Selection

Audit activities are selected using a risk-based approach. Internal audit meets with leadership and management during the development of the annual audit plan to discuss risks and potential impediments to meeting objectives. This plan is approved by the Executive and Audit Committee of the Board of Trustees. Audits can also be conducted based on concerns reported on the fraud and ethics hotline.

Planning

Each audit requires planning, starting from defining the scope and objective to developing audit steps to meet the objective. Internal audit conducts an entrance meeting with management to discuss the purpose of the audit, risk factors, and other logistics. Management is included in the planning phase and the details are documented in planning and scoping memo.

Fieldwork

During the fieldwork phase, auditors conduct the steps identified in the planning process. Steps often include conducting interviews, reviewing laws, policies and best practices, verifying sample transactions, analyzing data sets, and conducting surveys. Auditors meet regularly with management throughout fieldwork and discuss the status of the audit, preliminary observations, and potential recommendations.

Reporting

Auditors conduct an exit meeting with management at the conclusion of the fieldwork to discuss the results of the audit, specific findings and recommendations and other observations. Auditors communicate these to management through an audit observation memo and ask management to provide a response with a corrective action plan and timeline to implement. These responses are included in the final report. Management and leadership are provided an opportunity to review drafts and provide feedback.

Follow-up

All audit recommendations and management corrective action plans are followed up on to provide assurance that plans are implemented. Corrective action plans that do not appear to be progressing are reported annually to the president and Executive and Audit Committee.

How do Banks Audit Loans And Advances?

Audit Procedures for testing Loans and Advances include Tests of Controls and Substantive Tests. 

Test of Controls:

Controls relevant to Loans and Advances include approving new bank facilities, monitoring loan covenants, reviewing classification and measurement, and segregating duties.

• Approving New Bank Facilities: This control ensures all new facilities such as overdrafts, term loans, or advances obtain from any financial institutions are approved by appropriate and authorized personnel within the entity. This can reduce the risk of “hidden” Loans and Advances which are either obtained for management’s personal reason or to finance unauthorized projects.
• Monitoring of Loan Covenants: All Loans and Advances have covenants attached, such as compliance with a certain gearing ratio or requirement of approval from the lender before paying a dividend. This is a way for the lender to protect itself from potential defaults. Breaching the loan covenants can trigger a default clause, allowing the lender to demand full repayment immediately. This control helps the entity monitor the compliance to loan covenants and avoid a breach.
• Review Classification and Measurement: This control ensures the entity correctly applied the guidance under IFRS 9 to classify, initially measure and subsequently remeasure its Loans and Advances.
• Segregation of Duties: This control is essential as it helps to ensure work performed by one individual is subsequently reviewed by another individual. This will reduce the Risk of Material Misstatement arising from either fraud or error.

Substantive Audit Procedures for Loans and Advances:

Substantive Audit Procedures for Loans and Advances consist of the following components:

1) Substantive Analytical Procedures:

Substantive Analytical Procedures are performed by looking at the changes or lack of changes in the entity’s financials’ performance.

The changes or lack of changes must be benchmarked against a set expectation such as historical performance, latest business developments, and any other information relevant to the entity. Such information will then allow the auditor to detect the potential risk of material misstatements.

For example, a substantial increase or decrease in Loans and Advances by itself may not indicate or provide any audit evidence or indication of risk.

It could mean the entity has obtained additional Loans and Advances (increase) or has repaid them (decrease).

Read Also: How a Credit Score is Calculated

However, if such growth is benchmarked against an increased gearing ratio or interest cover ratio, this could help identify risks such as overstatement of assets or profit.

2) Test of Details for Loans and Advances:

To test details for Loans and Advances, audit procedures are designed around assertions. Example and description of test of details are given in the table below:

Audit Assertion	Example of Audit Procedure
Existence/Rights and Obligation	Sighting to legal documents, bank statements (cash received from Loans and Advances drawdown), and obtaining external bank confirmation.
Completeness	Obtaining external bank confirmation from all banks the entity has financial dealings with as the banks will often disclose incomplete, such financial transactions when requested by the auditor.
Valuation	Reviewing and recomputing the accounting treatment applied by the entity on the classification and measurement of Loans and Advances to ensure compliance with IFRS 9.   Recomputing foreign currency-denominated Loans and Advances.
Presentation and Disclosure	Reviewing the entity’s financial statements and identifying if the Loans and Advances amounts reported in financial notices and the relevant disclosures are correct and complete following applicable accounting standards.