CA Intermediate · Auditing and Ethics · Audit of Banks
During a bank audit, CA Vivek notices that a bank has granted a ₹5 crore loan to a company in which the bank's chairman is a director, at interest below the bank's prevailing rate, with no board approval recorded. Considering the auditor's duties, which response is most appropriate?
The auditor should treat it as a related party transaction, gather evidence on approvals and terms, assess compliance with law and RBI directions, and communicate and report as required. Regular repayment does not cure a possible non-compliance, and silent settlement or exclusion from testing is inappropriate.
- ATreat it as a normal advance because the loan is regular in repayment
- BEvaluate the transaction as a related party matter, obtain evidence of approvals and terms, assess compliance with applicable law and RBI directions, and report/disclose as required including in the audit report or to those charged with governanceCorrect
- CExclude the loan from sample testing since it is an insider exposure
- DAdvise the chairman to repay and say nothing in the audit report
Explanation
Under SA 550 and the Companies Act and banking regulation provisions on loans to directors and related entities, the auditor must examine approvals, terms and disclosure. Communication to those charged with governance and reporting follow. Ignoring or privately settling the issue would be wrong; being regular in repayment does not remove the compliance concern.
Did you get it right without looking?
One question tells you little. A timed set on Audit of Banks shows your real accuracy, how long you take and where you lose marks.
More Audit of Banks questions
- During the audit of Konkan Bank's investment portfolio, the auditor notes that securities held under the 'Held to Maturity' category were so…
- In a bank audit, the auditor finds that the bank's treasury has classified a large block of government securities as Held to Maturity (HTM) …
- During the audit of Narmada Bank, the statutory auditor finds that the bank has not made adequate provision on NPAs as required by RBI norms…
- The auditor of Narmada Cooperative Commercial Bank, a statutory central auditor, is planning to verify the bank's compliance with the cash r…
- CA Sunita, a statutory auditor of a bank, wants to verify cash balances at several branches. Which procedure is the most appropriate and eff…
- While auditing Sahyadri Urban Bank's advances portfolio, the auditor finds that a cash credit account has remained 'out of order' because th…