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CA Intermediate · Auditing and Ethics · Audit of Banks

At a branch of Kaveri Urban Bank, the auditor finds that during the last week of March, a borrower account classified as sub-standard was credited with a large amount transferred from another loan account of the same borrower group, and the account was upgraded to standard on 31 March. The amount was reversed through a debit on 3 April. What is the most appropriate audit conclusion?

The auditor should treat the upgrade as invalid, suspecting evergreening or window dressing. A credit sourced from the borrower group's own loan and reversed days later is not genuine recovery, so the account stays non-performing with provisioning, and the effect on the audit report should be considered.

  1. AAccept the upgrade, since the account showed credit at the balance sheet date
  2. BTreat it as possible evergreening or window dressing; the upgrade is not valid, the asset should remain NPA with required provisioning, and the matter should be evaluated for reportingCorrect
  3. CAccept the upgrade but disclose the reversal as a non-adjusting event only
  4. DIgnore it because transfers between accounts of the same group are always genuine recoveries

Explanation

Credits that are routed from the borrower's own group and reversed shortly after are not genuine recovery from the borrower's own cash flows. Upgrading on that basis is evergreening or window dressing. The asset stays NPA with provision, and the auditor considers the effect on the report and communication with those charged with governance. Accepting the upgrade because of the balance-sheet-date credit ignores substance.

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