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CA Intermediate · Auditing and Ethics · Audit of Banks

Himalaya Cooperative Bank's branch has a long-standing practice of classifying an advance as NPA only when the borrower account has been overdue for a prolonged period. The branch auditor notes that the RBI's income recognition and asset classification norms apply to the bank. A term loan of Rs 40 lakh has had interest unserviced for more than 90 days as at the balance sheet date. What is the correct audit response?

The auditor should treat the term loan as an NPA because interest has remained overdue for more than 90 days under RBI prudential norms. The auditor should then verify that interest income is not recognised and that provisions are made. Bank policy cannot override regulatory classification requirements.

  1. AAccept the branch's practice, as classification is a management judgement under the bank's own policy
  2. BTreat the account as non-performing under the prudential norms and check that income is not recognised on it and that provisioning is madeCorrect
  3. CClassify it as a standard asset but disclose the overdue interest in the notes
  4. DDefer the classification until the next quarter's review is completed by the head office

Explanation

Under RBI prudential norms, a term loan with interest overdue for more than 90 days is a non-performing asset. The auditor must verify that the classification is correct, that income is not recognised on it on an accrual basis, and that the required provision is made. Management's own policy cannot override the regulatory norms, so accepting the branch practice is wrong.

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