CA Intermediate · Auditing and Ethics · Audit of Banks
During the audit of Konkan Bank, the auditor, CA Meera, observes that the bank holds Rs 500 crore in Government securities classified as Held to Maturity (HTM). Management states that it intends to hold them till maturity, but the bank sold HTM securities worth Rs 30 crore during the year to meet liquidity needs, which is beyond the permitted limit. What is the most appropriate audit response?
The auditor should examine whether HTM sales exceeded the regulatory limit and verify that the bank applied the required consequences and disclosures. Management's stated intention alone is insufficient evidence. If the bank is non-compliant, the auditor should consider modifying the opinion.
- AAccept management's representation of intent, as intention is the sole criterion for classification
- BEvaluate whether sales exceeded the regulatory limit for HTM, and if so, check that the bank has complied with the prescribed consequences, such as the required reclassification or disclosure, and consider the effect on the opinion if non-compliantCorrect
- CIgnore the sales since Government securities carry no credit risk
- DRequire the securities to be shown at cost without any disclosure
Explanation
Classification depends on regulatory norms and actual conduct, not only on management's stated intent. Sales beyond the permitted limit of HTM require compliance with prescribed consequences. The auditor should obtain evidence of sales, compare with limits, and verify compliance and disclosure, modifying the opinion if misstatement or non-compliance remains. Representation alone is not sufficient evidence.
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