CA Intermediate · Auditing and Ethics · Audit of Banks
During the audit of a commercial bank, the auditor selects term loans sanctioned in the year to test credit appraisal. The bank's sanction letter for a Rs 5 crore loan to a manufacturing firm requires a hypothecation of stock and a personal guarantee by the directors. The documents show the guarantee was never executed, though the loan was disbursed. What is the best audit response?
The auditor should report the breach of sanction conditions to the appropriate management level and evaluate its implications for security, asset classification, provisioning and the audit report. Auditors neither cancel loans nor obtain guarantees themselves, and the lapse cannot be dismissed as procedural when security is affected.
- ATreat it as an immaterial procedural lapse and take no action
- BReport the non-compliance with sanction terms to appropriate level of management and consider its effect on security, provisioning and the audit reportCorrect
- CCancel the loan in the books on the auditor's authority
- DSeek a new guarantee personally from the directors
Explanation
Disbursal without complying with sanction conditions weakens the bank's security and internal control. The auditor should communicate it to management and evaluate its effect on asset classification, provisioning and reporting. Auditors do not alter transactions or obtain documents themselves.
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
- The statutory auditor of a bank branch notices that several staff members have access to modify interest rates in the core banking system (C…
- CA Meera is the statutory central auditor of a nationalised bank. While planning the audit, she wants to decide how to obtain comfort over t…
- During the audit of a scheduled commercial bank, auditor Rohit finds that a term loan of ₹2 crore has had interest unpaid and overdue for mo…
- In the audit of Ganga Urban Bank, the long form audit report (LFAR) is required by RBI. Which statement about the LFAR is correct?
- While auditing Lakshmi Vilas Nagar Bank's advances at a branch, the auditor notices that a cash credit account has remained 'out of order' b…
- CA Anita is the statutory central auditor of a bank with 400 branches. She visited 25 branches and relied on branch auditors for 150 others,…