audit of loans, its accounting system and sinking fund. session title
TRANSCRIPT
42510011 0010 1010 1101 0001 0100 1011
Audit of Loans, its accounting system and
Sinking Fund.
Session Title
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Training Module on Audit of ULBs Session 4 2
Session Overview
•In this session we will discuss – loans received/raised by municipalities and
municipal corporations,
– its accounting system,
– application and utilisation of sinking fund.
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Training Module on Audit of ULBs Session 4 3
•The inputs will enable the participants
– to acquire basic concepts of accounting system
of loans, and
– maintenance of Sinking Fund.
Learning Objective
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Training Module on Audit of ULBs Session 4 4
Introduction
• For any specific purpose, the municipalities /
corporations may, on sanction by the State
Government, borrow funds either by issuing
debentures or other-wise;
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Training Module on Audit of ULBs Session 4 5
Introduction
• These are generally secured by movable and
immovable properties vested in the ULB.
• The loans can be used only for any purpose
as specified in the approval.
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Training Module on Audit of ULBs Session 4 6
• On the sanction for establishing a Sinking
Fund to repay loan, the ULB shall establish it
and credit to it, funds from the Municipal
Fund.
Introduction
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Training Module on Audit of ULBs Session 4 7
• Similarly, the ULB may create an escrow
account for repayment of loans, and credit to
it, the income earmarked for this.
Introduction
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Training Module on Audit of ULBs Session 4 8
• The purpose of establishment of a sinking fund
or an escrow account is to accumulate money,
including interest, adequate to repay the loan.
Introduction
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Training Module on Audit of ULBs Session 4 9
Power of the Kolkata Municipal Corporation (KMC) to raise loans (This may be adopted as per State specific scenario)
•The Corporation may raise a loan
– by issue of debentures or otherwise on the
security of any of the taxes, surcharges, cesses
and
– fees under the relevant Act or on the guarantee
by the State Government,
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Training Module on Audit of ULBs Session 4 10
Purpose to raise loans
• for construction of works,• for the acquisition of land or buildings,• to pay off any debt due to the State
Government,
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Training Module on Audit of ULBs Session 4 11
Purpose to raise loans
• to repay a loan raised,• for the acquisition of a public utility concern
which renders such services,• for the purchase of vehicles, locomotive
engines, boilers and machinery necessary for carrying out function,
• for any other purposes
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Training Module on Audit of ULBs Session 4 12
Purpose to raise loans
• Provided that—
– prior sanction of the State Government is
required, and
– the rate of interest to be paid for such loan
etc. shall be subject to the approval of the
State Government.
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Training Module on Audit of ULBs Session 4 13
• Loan shall not be applied to any other purpose
other than that for which it has been raised.
Power of the KMC to raise loans contd.
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Training Module on Audit of ULBs Session 4 14
• Loan raised for the construction of works
shall only be applied to the payment of
salaries or allowances to the employees
engaged in the construction.
Power of the KMC to raise loans contd.
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Training Module on Audit of ULBs Session 4 15
Limit to the power of the KMC of raising loans
• The power of Corporation to raise a loan
shall not exceed 15% of the annual value of
land and buildings as determined under the
Act.
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Training Module on Audit of ULBs Session 4 16
Power of KMC to open a credit a/c with a bank
• The Corporation may take credit, from any
scheduled bank on a Cash Account to be
kept in the name of the KMC Cash
Account.
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Training Module on Audit of ULBs Session 4 17
Time for repayment of loans
• The time for repayment of any loan shall
– not exceed sixty years, and
– the time for repayment of any loan raised for
the purpose of discharging any previous loan
shall not extend beyond the unexpired portion
of the period.
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Training Module on Audit of ULBs Session 4 18
Manner of repayment of loans
• Every loan raised by the Corporation shall
be repaid within the time approved;
• such repayment shall be made either
– (a) from a Sinking Fund or
– (b) partly from such Sinking Fund and partly
from the loan raised for the purpose.
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Training Module on Audit of ULBs Session 4 19
Priority of payments for interest and repayment of loans over other payments
• All payments due from the Corporation on
account of interest on and repayment of,
shall have priority over all other payments
due from the Corporation.
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Training Module on Audit of ULBs Session 4 20
Establishment and maintenance of Sinking Funds for loans
• Corporation shall establish a separate
Sinking Fund in respect of each loan;
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Training Module on Audit of ULBs Session 4 21
Investment of the amount at the credit of a Sinking Fund
• All moneys credited to a Sinking Fund shall be invested by the Corporation in:– Government securities, or– Securities granted by the Central or State
Government, or– Debentures issued by the Corporation,– Such other public securities as may be
approved by the State Government,
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Training Module on Audit of ULBs Session 4 22
Discharge of the Corporation from liability under debentures
• The Corporation shall be discharged from
all liabilities when-
– the amount due on a debenture has been paid on
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Training Module on Audit of ULBs Session 4 23
Discharge of the Corporation from liability under debentures
– a debenture has been renewed or issued upon
subdivision, amalgamation or exchange,
– a duplicate debenture has been issued in lieu of
one alleged to have been lost, stolen or
destroyed, either wholly or in part,
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Training Module on Audit of ULBs Session 4 24
Application of Sinking Funds
• Until any loan is wholly repaid, the
Corporation shall not apply the money at
the credit of the concerned Sinking Fund for
any other purpose.
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Training Module on Audit of ULBs Session 4 25
Annual statement by Municipal Commissioner
• The Municipal commissioner shall, at the end
of each year, prepare a statement showing-
– The amount which has been invested during the
year,
– The date of last investment made during the year,
– The aggregate amount of the securities in the hands
of the Corporation at the end of the year,
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Training Module on Audit of ULBs Session 4 26
Annual statement by Municipal Commissioner
– The aggregate amount which has been applied
for the purpose of repayment of loan.
– Every such statement shall be laid before a
meeting of the Corporation and shall be
published in the Official Gazette.
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Training Module on Audit of ULBs Session 4 27
Annual examination of Sinking Funds
• All Sinking Funds shall be annually examined by the statutory audit;
• Audit shall ascertain whether the cash and the value of securities belonging thereto are equal to the amount which should be at the credit of such funds.
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Training Module on Audit of ULBs Session 4 28
Annual examination of Sinking Funds
• The amount which should be at the credit of a
Sinking Fund shall be calculated on the basis
of the sums credited to such fund.
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Training Module on Audit of ULBs Session 4 29
Annual examination of Sinking Funds
• The Corporation shall pay into a sinking fund
such amount as the auditors may certify to be
deficit in respect of such fund, unless the State
Government specially sanctions a gradual
readjustment of such debit.
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Training Module on Audit of ULBs Session 4 30
• If the cash and the value of the securities at the
credit of a sinking fund are in excess of the
amount which should be at its credit, the
auditors shall certify the amounts of such
excess sum;
Annual examination of Sinking Funds contd.
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Training Module on Audit of ULBs Session 4 31
• If such excess fund is found the Corporation
shall transfer it to the Municipal Fund in the
General Account.
Annual examination of Sinking Funds contd.
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Training Module on Audit of ULBs Session 4 32
Power to borrow money from theState Government.
• The Corporation may borrow money from the
State Government on such terms and
conditions as the State Government may
determine.
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Training Module on Audit of ULBs Session 4 33
Power to borrow money from theState Government.
• If any such money is not repaid, or any
interest is not paid, the State Government may
attach the Municipal Fund.
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Training Module on Audit of ULBs Session 4 34
Accounting Principle
• Interest expenditure on loan shall be
recognised on accrual basis.
• Interest on borrowings directly attributable to
acquisition or construction of qualifying
fixed assets up to the date of commissioning
of the assets shall be capitalised.
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Training Module on Audit of ULBs Session 4 35
Accounting Principle
• A provision shall be made for the interest accrued between the date of last payment of interest and the date of financial statements.
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Training Module on Audit of ULBs Session 4 36
Accounting Principle
• The expenses incurred while issuing of debentures or bonds shall be deferred, and
• amortised in equal installments over a period of 5 years or the tenure of the loan whichever is earlier.
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Training Module on Audit of ULBs Session 4 37
• In case, the debentures & bonds are
prematurely redeemed,
– the amount of issue expenses outstanding during
the year shall be written-off, and
– charged to the Income and Expenditure Statement.
Accounting Principle
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Training Module on Audit of ULBs Session 4 38
• All other expenses in respect of raising loans
other than those considered, as issue expenses
shall be expensed off in the year in which they
are incurred.
Accounting Principle
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Training Module on Audit of ULBs Session 4 39
Accounting procedure for Receipt of Loan
• The amount borrowed as per the terms of
sanction shall be entered in the Register of
Loans;
• A separate folio shall be allotted for each loan
taken;
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Training Module on Audit of ULBs Session 4 40
Accounting procedure for Receipt of Loan
• In case, sanction has been obtained for issuing
debentures, the particulars of the debenture
holder shall be recorded in the Register of
Debentures.
• Amount received as loan shall be deposited in
the Designated Loan Bank Account.
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Training Module on Audit of ULBs Session 4 41
Raising / Borrowing of Funds
• On receipt of loan, the Accounts Department shall
pass the entries as shown in the table given below:
Code of Account
Accounting Entry
Dr./ Cr.
Debit Amount
(Rs.)
Credit Amount (Rs.)
Books to be entered into
450- (b)
331-70-(a)
Designated Loan Bank AccountTo Bonds & debentures
Dr.
Cr.
10,00,000 10,00,000 Cash BookLedger, Register of Debenture
All figures are illustrative
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Training Module on Audit of ULBs Session 4 42
Accounting of interest payable on loan / debenture
Recording of interest accrued:
• the Accounts Department shall pass the entry for
payment of interest as approved by the authorities
designated by the municipalities and municipal
corporations,
• the entries shown in the table appears in next slide-
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Training Module on Audit of ULBs Session 4 43
Code of Account
Accounting EntryDr./ Cr.
Debit Amount (Rs.)
Credit Amou
nt (Rs.)
Books to be entered into
240 – (b)350-12-(a)
Interest & Finance Charges
To Interest Accrued &
due – Loans
Dr.
Cr.
1,00,000
1,00,000
Journal BookLedger, Register of Loans,Register of Debenture
Figures are illustrative
Code of Account
Accounting EntryDr./ Cr.
Debit Amount
(Rs.)
Credit Amount
(Rs.)
Books to be entered into
290- (a)311-50-(b)
Transfer to Sinking FundTo Sinking Fund
Dr.Cr.
1,00,000 1,00,000 Journal Book, Ledger, Register of Sinking Fund
Figures are illustrative
Accounting of interest payable on loan / debenture
NEXT
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Training Module on Audit of ULBs Session 4 44
• Investments made in respect of Sinking Fund shall be entered in a Sinking Fund Investment Register.
Accounting of interest payable on loan / debenture
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Training Module on Audit of ULBs Session 4 45
• The accounting entries/procedures to be
followed for investments of such moneys are
similar to those followed in respect of other
investments.
Accounting of interest payable on loan / debenture
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Training Module on Audit of ULBs Session 4 46
• Interest earned on Investments, profit/loss on
disposal of Investments, if any, shall be
updated in the Register of Sinking Fund.
Accounting of interest payable on loan / debenture
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Training Module on Audit of ULBs Session 4 47
• On examination, if the present value of sinking fund
investment is less than the value of the Fund
sanctioned, the difference shall be made good from
the Municipal Fund.
Figures are illustrative
Accounting of interest payable on loan / debenture
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Training Module on Audit of ULBs Session 4 48
• The Accounts Department shall pass the following
entry:
Code of Account
Accounting EntryDr./ Cr.
Debit Amount
(Rs.)
Credit Amount (Rs.)
Books to be entered into
290-(a)311-50-(a)
Transfer to Sinking Fund To Sinking Fund
Dr.Cr.
5,0005,000
Journal BookLedger, Register of Sinking Fund
Figures are illustrative
Accounting of interest payable on loan / debenture
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Training Module on Audit of ULBs Session 4 49
Repayment of Loan / Redemption of Debentures in case where Escrow Account is created
• In case of provision for establishment of an Escrow account:– an equivalent amount shall be transferred to the Escrow
account based on collections of earmarked income. For example, if a loan has been taken for building Water
Supply Infrastructure, then out of the water supply income collected, an amount equal to certain percentage of water tax shall be deposited into the Escrow account.
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Training Module on Audit of ULBs Session 4 50
For creation of Escrow Account, the Accounts Department shall pass the following entry:
Code of Account
Accounting EntryDr./ Cr.
Debit Amount
(Rs.)
Credit Amount
(Rs.)
Books to be entered
into
450-41-(a)
450-21-(a)110-02-(a)
Designated Bank Account Bank Account To Tax Revenues – Water Taxes
Dr.
Dr.Cr.
3,00,000
7,00,00010,00,000
Cash BookLedger, Register of Loans,Register of Debenture
Figures are illustrative
Repayment of Loan/Redemption of Debentures in case where Escrow Account is created contd.
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Training Module on Audit of ULBs Session 4 51
Investment of amount lying in Escrow Account
• Investments shall be entered in an Escrow
Account Investment Register.
• The accounting procedures are similar to those
followed in respect of other investments.
• Interest earned on Investments, profit / loss on
disposal of Investments, if any, shall be updated in
the Escrow Account Investments Register.
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Training Module on Audit of ULBs Session 4 52
Accounting and payment of Interest on Loans / Debentures
• Will be same as in case of ‘Accounting procedure
of interest payable on loan / debentures.
• The only difference being payment will be out of
Escrow Bank Account instead of Main Bank
Account.
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Training Module on Audit of ULBs Session 4 53
Accounting for Expenditure incurred in raising loans or issuing debentures
• The municipalities/corporations may incur
expenses such as credit rating fees, security creation
fees, stamp duty, etc., at the time of raising loan or
issuing debentures;
• These expenses shall be deferred and be classified
as Loan Issue Expenses;
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Training Module on Audit of ULBs Session 4 54
Accounting for Expenditure incurred in raising loans or issuing debentures • After payment, the Accounts Department shall
pass the entry as shown in the table given below:
Code of Account
Accounting Entry Dr./ Cr.Debit
Amount (Rs.)
Credit Amount
(Rs.)
Books to be entered into
480-10-(a)
450-21-(a)
Loan Issue Expenses –DeferredTo Bank Account*
Dr.
Cr.
50,000
50,000
Cash Book, Ledger,
Figures are illustrative
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Training Module on Audit of ULBs Session 4 55
• The Loan Issue Expenses shall be amortised in equal installments over a period of 5 years or the tenure of the loan whichever is lower.– For instance, issue expenses of Rs. 50,000 incurred for
raising loan shall be amortised over a period of 5 years in equal installments of Rs. 10,000/- every year.
Figures are illustrative
Accounting for Expenditure incurred in raising loans or issuing debentures
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Training Module on Audit of ULBs Session 4 56
At the end of each financial year, for amortising the relevant portion of Loan Issue Expenses, the A/cs Deptt. shall pass the following entry:
Code of Account
Accounting Entry Dr./ Cr.Debit
Amount (Rs.)
Credit Amount
(Rs.)
Books to be entered into
270-50-(a)
480-10-(a)
Miscellaneous Expenditure written offTo Loan Issue Expenses Deferred
Dr.
Cr.
30,000
30,000
Journal BookLedger,
Figures are illustrative
Accounting for Expenditure incurred in raising loans or issuing debentures
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Training Module on Audit of ULBs Session 4 57
Internal Controls
• The Head of the A/cs Deptt. shall ensure
– that adequate provision is made for the interest accrued
between the date of last payment of interest and the date
of Financial Statements and
– is charged to the current period’s Income and Expenditure
Statement.
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Training Module on Audit of ULBs Session 4 58
Internal Controls
• The Head of the A/cs Deptt. shall– carry out physical verification of Sinking Fund
Investment documents and
– compare with the Sinking Fund Investment Account.
– monitor the funds borrowed and ensure proper utilisation of funds.
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Training Module on Audit of ULBs Session 4 59
Internal Controls
• The Head of the A/cs Deptt. shall ensure that – the present value of the sinking fund investment ties up
with the value of the Fund as per the State Government’s sanction.
– the transfers to escrow account out of income collected are as per the conditions of borrowings.
• If any mismatch is observed, the adequate funds shall be transferred from the Main Bank Account to Sinking Fund Bank Account.
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Training Module on Audit of ULBs Session 4 60
• The Chief Executive Officer/Head of the
municipalities/corporations shall specify
– such appropriate calendar of returns / reports for
monitoring.
• All Reconciliation Statements shall be certified by the
Head of the Accounts Department and verified.
Internal Controls
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Training Module on Audit of ULBs Session 4 61
Audit points on Loans
• In case of raising of loans
– could the auditor ensure that the same was within the
power of the Corporation?
• Was there any case of raising of loans without the
prior sanction of the State Government?
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Training Module on Audit of ULBs Session 4 62
Audit points on Loans
• Were the necessary particulars, viz. the rate of
interest to be paid for such loans and the terms and
conditions of repayment approved by the State
Government?
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Training Module on Audit of ULBs Session 4 63
Audit points on Loans
• Could the auditor ensure
– the power of the Corporation to raise a loan did not
exceed 15% of the annual value of land and buildings?
• In case of opening a credit account with a bank instead of raising loan, was the same sanctioned by the State Government?
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Training Module on Audit of ULBs Session 4 64
Audit points on Loans
• Was there any case where the time for repayment of
any loan exceeded 60 years?
• Did the Corporation establish
– a separate Sinking Fund in respect of each loan and
– was due credit to such fund provided every six months?
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Training Module on Audit of ULBs Session 4 65
Audit points on Loans
• Were all moneys credited to a Sinking Fund invested
in
– Government Securities, Debentures issued or other public
securities as approved by the Government?
• Was there any case of delay in investment? If so, the
reasons there for should be analysed.
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Training Module on Audit of ULBs Session 4 66
Audit points on Loans
• Was there any case of application of the money at
the credit of the concerned Sinking Fund for any
purpose other than the purpose of repayment of loan
before full repayment of the loan?
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Training Module on Audit of ULBs Session 4 67
Audit points on Loans
• Did the Municipal Commissioner prepare – an annual statement showing the necessary particulars of
investment made during a year?
• Was such statement laid – before a meeting of the Corporation and published in the
Official Gazette?
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Training Module on Audit of ULBs Session 4 68
Audit points on Loans
• Were all Sinking Funds submitted to statutory audit for annual verification? If not, why? If yes, the report thereof should be analysed.
• Could the auditor ensure – amount at the credit of a Sinking Fund was calculated on
the basis of the sums credited to such fund?
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Training Module on Audit of ULBs Session 4 69
Audit points on Loans
• Was there any case – where any amount was certified by the statutory auditor
as deficit for a Sinking Fund and,
– in such case, did the Corporation pay the same into the respective Sinking Fund?
• Was the case of deficit or excess, if any, after due adjustment, referred to the State Government for their decision?
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Training Module on Audit of ULBs Session 4 70
Audit points on Loans
• Was the amount borrowed as per the terms of the
sanction entered in the Register of Loans
maintained by the Accounts Department?
• In case of debentures, were the particulars of the
debenture holder recorded in the Register of
Debentures?
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Training Module on Audit of ULBs Session 4 71
Audit points on Loans
• Was the amount received as loan – deposited in the Designated Loan Bank
Account? • Were investments made in respect of Sinking Fund
– entered in a Sinking Fund Investment Register?
The End