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CA Intermediate · Auditing and Ethics · Audit of Banks

During the audit of Konkan Bank's investment portfolio, the auditor notes that securities held under the 'Held to Maturity' category were sold before maturity in a quantity well above the permitted limit during the year, without regulatory approval. The securities are still carried at acquisition cost with premium amortised. Which audit response is most appropriate?

The auditor should examine the breach of the permitted sales limit and assess whether the remaining securities must be reclassified and revalued under the prudential investment norms, then reflect the effect in the report if needed. Merely accepting cost or disclosing sales in the directors' report is inadequate.

  1. AAccept the carrying value because HTM securities are never marked to market
  2. BExamine whether the bank has breached the sales limit for the HTM category and, if so, whether the remaining HTM securities should be reclassified and valued under the applicable investment norms, reporting accordinglyCorrect
  3. CAsk the bank only to disclose the sales in the directors' report
  4. DRequire the bank to write off the entire portfolio

Explanation

HTM carries limited permitted sales, and exceeding them calls into question the classification and the intent to hold. The auditor must check the prudential norms' consequences, such as reclassification and valuation, and consider the effect on the financial statements and report. Saying HTM is never marked to market ignores the breach, and a full write-off is not a prescribed consequence.

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