CA Intermediate · Auditing and Ethics · Audit of Banks
During the audit of Himalaya Bank's advances portfolio, CA Arjun notes that a large account, secured by stock hypothecation, has been classified as a standard asset although the stock statements submitted by the borrower have not been received for several months and the borrower's drawing power cannot be determined. What should be Arjun's best response?
The auditor should check whether the account is irregular under RBI norms because drawing power cannot be determined, evaluate reclassification and provisioning, and consider a modified opinion if management does not correct a material misstatement. Past standard status or dropping the sample is not an acceptable response.
- AAccept the classification because the account was standard in the earlier year
- BAssess whether the outstanding exceeds drawing power or the account is irregular as per RBI norms, evaluate the need for reclassification and provisioning, and consider the effect on his report if management does not adjustCorrect
- CRemove the account from the audit sample since information is unavailable
- DAsk the borrower's auditor to decide the classification of the account
Explanation
Absence of stock statements means drawing power cannot be established, so the account may be irregular or out of order under RBI norms, which can lead to NPA classification and provisioning. The auditor must evaluate this and, if management refuses to adjust a material misstatement, modify the opinion. Past classification is not conclusive evidence, and dropping the account or relying on another auditor is not appropriate.
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