Auditing and Ethics · Audit of Banks

Audit of Advances and Income Recognition Norms (NPA, Provisioning) for CA Intermediate

Updated 5 October 2026

Audit of advances means checking that a bank's loans exist, are recoverable, are classified correctly as standard, sub-standard, doubtful or loss, and carry the right provision. Under RBI norms, an account becomes an NPA when it is overdue for more than 90 days. Interest on an NPA is recognised only when received.

Understand Audit of Advances and Income Recognition Norms

Advances are the biggest asset of a bank and the biggest source of its income. They are also the biggest risk. If a borrower stops paying, the bank's profit and assets are overstated unless the loan is classified properly and a provision is made. So the auditor spends most of the time here.

RBI has laid down Income Recognition, Asset Classification and Provisioning (IRACP) norms. They remove judgement from the process as far as possible. Classification depends mainly on how long the account has been overdue, not on how the banker feels about the borrower.

A Non-Performing Asset (NPA) is a loan on which interest or an instalment of principal stays overdue for more than 90 days. For a cash credit or overdraft, the account is NPA if it is 'out of order'. NPAs are then put in three classes: sub-standard, doubtful and loss. Anything that is not an NPA is a standard asset.

Income follows the same logic. Interest on a performing loan is booked on accrual. Once the loan is an NPA, interest is not booked as income. It is taken only when actually received. Interest already booked and not collected is reversed. This stops the bank from showing profits it will never collect.

The auditor's job has two parts. First, verify the advances: sanction, documents, security, drawing power, balance confirmation and recovery. Second, test whether the bank has classified the accounts, made the provisions and recognised the income as the RBI norms require. The auditor does not need to re-do everything. The auditor tests a sample, with more weight on large and stressed accounts.

Key rules to remember

NPA test: term loans: Interest and/or principal overdue for more than 90 days → NPA; NPA status arises only when the overdue period exceeds 90 days. An account overdue for exactly 90 days does not meet the test. Count days the way the question states.
NPA test: cash credit / overdraft: Out of order if any one of these conditions persists for 90 days: the balance stays continuously above the sanctioned limit or drawing power; there are no credits; or credits do not cover the interest debited; A regular account can be an NPA even with no single 'overdue instalment'. The condition must continue for the full 90 days, not just appear on one day.
NPA test: bills purchased or discounted: Bill overdue for more than 90 days → NPA; Apply the same 'more than 90 days' test to the overdue bill. Count days the way the question states.
NPA test: agricultural crop loans: Short-duration crops: instalment or interest unpaid for two crop seasons → NPA. Long-duration crops: unpaid for one crop season → NPA; For agricultural crop loans, the crop-season rule is used instead of the 90-day test. Short-duration crops are those with a crop season of up to one year. Long-duration crops have a crop season longer than one year.
Asset classes: Standard → Sub-standard (NPA up to 12 months) → Doubtful (sub-standard for 12 months) → Loss (identified as uncollectible, amount not yet written off in full); Loss assets are those identified by the bank, its auditors or RBI inspectors as uncollectible and of such little value that their continuance as a bankable asset is not warranted, where the amount has not been written off in full.
Provision: sub-standard: Secured portion: 15%. Unsecured portion: 25% (20% for unsecured infrastructure loan accounts where the project cash flows are escrowed, as RBI specifies); Split the outstanding into secured and unsecured parts and apply the rate to each part. The lower 20% rate is a specific RBI concession for unsecured exposures in infrastructure loan accounts where the project cash flows are escrowed. It does not apply just because an exposure is unsecured. Other special rates may apply, so check the current RBI norms.
Provision: doubtful: Secured portion: up to 1 year 25%; more than 1 year up to 3 years 40%; more than 3 years 100%. Unsecured portion: 100%; The period runs from the date the account became doubtful.
Provision: loss: 100% of the outstanding; A loss asset is uncollectible and of such little value that its continuance as a bankable asset is not warranted. It should be written off. If it is kept on the books, full provision is needed.
Provision: standard assets: General rate 0.40%. Direct agriculture and SME: 0.25%. Commercial real estate: 1%. Commercial real estate – residential housing: 0.75%; Rates depend on the sector and change by RBI circular. Use the rate given in the question or the RBI circular in force at the date of the question.
Income recognition: Performing asset: accrual basis. NPA: cash (realisation) basis. Reverse previously accrued, uncollected interest; Upgrade to standard only when all arrears of interest and principal are paid.

How to solve Audit of Advances and Income Recognition Norms questions

Use this order for any question on advances, NPA or income recognition. It keeps your answer structured, and each step can earn marks.

1Read the facts and note the type of facility: term loan, cash credit/overdraft, bill, or agricultural loan. The NPA test depends on it.
2Apply the 90-day test (or the crop-season test) up to the balance sheet date. Use the day-count basis the question gives. If it gives none, count from the day after the due date and say so. The account is NPA only if the overdue period is more than 90 days, so the 91st day is the NPA date. RBI's day-end process flags the NPA status on that day, and the account is sub-standard from then.
3Classify the account: standard, sub-standard, doubtful or loss. Use the time spent as NPA to move from sub-standard to doubtful.
4Split the outstanding balance into secured and unsecured parts, using the realisable value of the security.
5Apply the provisioning rate to each part and add. Show the working line by line.
6Deal with income: stop accruing interest on NPAs, and reverse uncollected interest already booked.
7If the question asks about audit, state the procedures: verify sanction, security, documents, drawing power, balance confirmation, review of classification and provision.
8Give a one-line conclusion, such as the amount of provision required or the impact on profit.

Quickest way: Day-count, then rate table

When to use it: Use this for MCQs and for the calculation part of written answers when time is short.

MCQ: first look for the words 'more than 90 days'. If an option says 'at least 90 days' or 'more than 60 days', eliminate it.
Count days the way the question tells you. If it is silent, count from the day after the due date and state that basis. An account overdue for exactly 90 days does not meet the 'more than 90 days' test, which is a favourite trap. The 91st day is the NPA date, because RBI's day-end process flags NPA status on that day.
Memorise the rate ladder: sub-standard 15% secured / 25% unsecured; doubtful secured 25% / 40% / 100% by period; doubtful unsecured 100%; loss 100%.
Always split secured and unsecured before multiplying. Most wrong answers apply one rate to the whole balance.
For interest income, ask only: is the account NPA? If yes, income is on cash basis and old accrued interest is reversed.
Written format: Classification (with reason) → Secured/unsecured split → Provision working → Total → Audit implication. Each line earns step marks.

Common mistakes in Audit of Advances and Income Recognition Norms

Treating an account as NPA at exactly 90 days overdue.
Students remember '90 days' and forget the wording 'more than 90 days'.
Fix: Write 'more than 90 days' every time. State your day-count basis and treat the account as NPA only when the overdue period exceeds 90 days.
Applying the provisioning percentage to the whole outstanding balance in doubtful accounts.
The secured/unsecured split is skipped to save time.
Fix: Always find the realisable value of the security first. Unsecured doubtful portion takes 100%, and the secured portion takes the rate for the doubtful period.
Classifying an account by the borrower's condition, not by the days overdue.
Students judge by 'the borrower looks weak' instead of using the RBI tests.
Fix: Classification is rule-based. Use the overdue period, out-of-order status or the crop-season rule.
Continuing to book interest as income on an NPA.
Accrual accounting is the habit for most other items.
Fix: For NPAs, recognise interest only on receipt. Reverse interest already booked but not collected.
Forgetting that a cash credit can be an NPA without any overdue instalment.
Students only look for overdue instalments, which exist for term loans.
Fix: Test the 'out of order' conditions: balance above limit or drawing power, no credits, or credits less than interest debited, for 90 days.
Upgrading an NPA to standard once a part payment is received.
Students assume any recovery cures the account.
Fix: Upgrade only when all arrears of interest and principal are paid.

Worked examples

Example 1

A bank granted a term loan to a borrower. An instalment fell due on 31 December 2025 and has not been paid. The bank's balance sheet date is 31 March 2026. Count overdue days from the day after the due date. Is the account an NPA at that date? What would be the position on 1 April 2026 if it is still unpaid?

Show the solution

Identify the facility: a term loan. Under the RBI norms, as clarified in November 2021, the account is an NPA once interest or principal stays overdue for more than 90 days. The NPA date is therefore the 91st day of being overdue, and RBI's day-end process flags the NPA status on that day.
The instalment was due on 31 December 2025 and was not paid. On the stated basis (day after the due date is day 1), the overdue period starts on 1 January 2026.
Count the overdue days from 1 January 2026 to 31 March 2026: January 31 + February 28 + March 31 = 90 days.
Compare: the overdue period at 31 March 2026 is 90 days. The 91st day has not yet arrived, so the account has not crossed the 'more than 90 days' test at that date.
Note the early-warning position: an account overdue for 61 to 90 days is in the Special Mention Account category SMA-2. At 31 March 2026 this account is in SMA-2. It is a standard asset but a stressed one, and the auditor should watch it.
On 1 April 2026 the overdue period is 91 days, which is more than 90 days. The day-end process flags the account as an NPA on that day, the 91st day. It is sub-standard from 1 April 2026.

Answer: On the stated day-count basis (day 1 is the day after the due date), the account is overdue for 90 days at 31 March 2026. The NPA test needs overdue for more than 90 days, so 1 April 2026 (the 91st day) is the NPA date. So at the balance sheet date it is still a standard asset in SMA-2. If it is still unpaid on 1 April 2026, RBI's day-end process flags it as an NPA and it is sub-standard from 1 April 2026. Interest income on it is then recognised only when received. If the question uses a different day-count basis, redo the count on that basis.

Exam tips

Questions usually give dates or balances and ask you to classify and provide. Practise the day count and the secured/unsecured split until both are automatic.
In theory questions, list the audit procedures in a clear order: sanction and documents, security and its valuation, drawing power, balance confirmation, recovery, then classification and provision review.
MCQs often test one trap: 'more than 90 days', the doubtful rate ladder, or cash basis on NPA interest. Read the option wording slowly.
If a question gives a provision rate that differs from what you remember, use the rate in the question and state it. RBI circulars change from time to time.
Always add a closing line stating the effect of under-provision: profit and assets are overstated, and the auditor may need to modify the opinion.

Practice questions from Audit of Banks

Audit of Advances and Income Recognition Norms: frequently asked questions

When does a loan become an NPA?

A term loan becomes an NPA when interest or principal is overdue for more than 90 days. A cash credit or overdraft becomes an NPA when it is out of order for 90 days. Agricultural loans follow crop-season rules.

How is a sub-standard asset different from a doubtful asset?

A sub-standard asset has been an NPA for up to 12 months. If it stays sub-standard for 12 months, it becomes doubtful. Doubtful assets carry higher provisions, and these rise with the time spent in the doubtful class.

Can a bank book interest on an NPA as income?

No. Interest on an NPA is recognised only when it is actually received. Interest already booked and not collected must be reversed.

What is the auditor's main role in checking advances?

The auditor checks that the loans exist, are properly sanctioned and secured, and are classified correctly. The auditor also checks that provisions and income recognition follow the RBI norms. Large and stressed accounts get the most attention.