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CA Intermediate · Auditing and Ethics · Audit of Banks

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 more than 90 days as at the balance sheet date. The bank's management still classifies the account as a standard asset and continues to recognise interest income. What is the most appropriate audit response?

The auditor should test the account against RBI prudential norms. Interest overdue beyond 90 days makes the loan an NPA, so interest income must stop and provision be made. If management refuses to correct a material misstatement, the auditor should modify the audit opinion.

  1. AAccept the management's classification because the borrower's security value exceeds the loan amount
  2. BEvaluate the account against RBI prudential norms, and if it should be an NPA, require reversal of unrealised interest and provision, otherwise consider modifying the opinionCorrect
  3. CIgnore the matter since asset classification is the RBI inspector's job, not the auditor's
  4. DReport the matter only in the management letter and not in the audit report

Explanation

Under RBI prudential norms, a term loan with interest overdue for more than 90 days is an NPA, regardless of security value. Income recognition must stop and unrealised interest be reversed, with provisioning as required. If management does not correct a material misstatement, the auditor must modify the opinion. Leaving it to the RBI inspector is wrong because the auditor must verify compliance.

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