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CA Intermediate · Auditing and Ethics · Audit of Banks

CA Ritu is the statutory central auditor of Vindhya Bank. In reviewing a branch's term loan to a manufacturing company, she finds that interest of ₹18 lakh was debited to the loan account and credited to income in the last quarter although the account was overdue by more than 90 days at the end of the previous quarter and no recovery was received. The branch auditor has not commented on this. Which is the correct audit response?

The auditor should require reversal of the ₹18 lakh interest from income and stop recognising interest on the account until it is actually recovered. Income on non-performing assets is recognised on a cash basis, and if management refuses, the auditor must consider modifying the opinion.

  1. AAccept the income because it is accrued under the accrual concept
  2. BRequire reversal of the unrealised interest from income and not recognise further interest on the account until recovered, considering its effect on the report if management refusesCorrect
  3. CRecognise it as income but create a general provision of equal amount
  4. DDisclose the interest only as a contingent asset and keep it in income

Explanation

Income on NPAs is recognised only when actually received. Interest booked on an account that is already non-performing must be reversed, and no further interest should be taken to income until recovered. A provision against income left in the accounts does not correct the overstatement of income, and treating it as a contingent asset while retaining it in income is inconsistent. If management refuses, the overstated profit would lead to a modified opinion by the auditor.

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