CA Intermediate · Auditing and Ethics · Audit of Banks
In a bank audit, the auditor finds that the bank's treasury has classified a large block of government securities as Held to Maturity (HTM) at the beginning of the year. During the year, the bank sold a part of this block to meet liquidity needs, and the sale exceeded the permitted limit for HTM sales. Management argues that the sale was a one-off event and continues to show the balance at book value. Which is the most appropriate audit response?
The auditor should evaluate compliance with RBI investment classification and valuation norms, including the effect of breaching the permitted HTM sale limit, and report any resulting misstatement or non-compliance. Management's one-off explanation does not override the RBI norms, and investments are clearly within a bank audit's scope.
- AAccept management's argument since HTM securities are always carried at cost
- BEvaluate compliance with RBI investment classification and valuation norms, including consequences of breaching the HTM sale limit, and report any non-compliance affecting the financial statementsCorrect
- CAsk management to reclassify all securities as Held for Trading without referring to RBI norms
- DIgnore the matter because investments are not part of a bank's audit scope
Explanation
RBI norms restrict sales from the HTM category beyond a permitted limit, and a breach has consequences for classification and valuation of the remaining portfolio. The auditor must check compliance with these norms and evaluate their effect on the financial statements, reporting if the treatment is not corrected. Accepting book value on the basis of a one-off argument ignores the norms, and arbitrary reclassification is not the auditor's decision.
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