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CA Intermediate · Auditing and Ethics · Audit of Banks

A statutory auditor of Himgiri Bank is verifying the asset classification of a loan secured by a mortgage. The borrower's account was classified as sub-standard, and has remained sub-standard for 12 months. Which statement reflects the correct audit position?

The asset should be moved to the doubtful category because it has stayed sub-standard for 12 months, and provision must be made at the higher rate for doubtful assets. It is not automatically a loss asset, and it cannot be upgraded by a paper restructuring.

  1. AThe asset should now be classified as a loss asset with no further consideration
  2. BThe asset should be moved to the doubtful category, with provisioning at the higher rate applicable to doubtful assetsCorrect
  3. CThe asset continues as sub-standard for as long as the security remains valid
  4. DThe asset can be upgraded to standard merely by the bank's decision to restructure it on paper

Explanation

An asset that has remained in the sub-standard category for 12 months is classified as doubtful, attracting higher provisioning. Loss assets are those identified as uncollectible by the bank, auditors or RBI inspectors. Security does not keep an asset as sub-standard indefinitely, and upgrades require satisfying the prescribed norms, not a paper restructuring.

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