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CA Intermediate · Auditing and Ethics · Audit of Banks

During the audit of a scheduled commercial bank, the auditor examines a term loan account that has remained overdue for more than 90 days as at the balance sheet date. The bank's management continues to recognise interest income on this account on an accrual basis and classifies the loan as standard. What is the most appropriate audit response?

The auditor should insist that the loan be classified as a Non-Performing Asset under RBI prudential norms, because it is overdue beyond 90 days. Unrealised interest must be reversed and provisions made, and the auditor should modify the report if management does not correct the treatment.

  1. AAccept management's treatment because interest has been accrued under the contract
  2. BTreat the loan as a Non-Performing Asset under RBI norms, require reversal of unrealised interest and appropriate provisioning, and report if not correctedCorrect
  3. CAsk management to recognise interest on a cash basis only after the next financial year
  4. DDisclose the account only as a contingent liability in the notes

Explanation

Under RBI prudential norms, a term loan with interest or principal overdue for more than 90 days is an NPA. Income on an NPA is recognised only when actually received, so accrued interest must be reversed, and provisions made as per the asset classification. If management refuses, the auditor should modify the opinion. The accrual treatment and the contingent liability treatment both ignore the prudential norms.

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