CS Professional · Internal and Forensic Audit · Internal Audit of Specific Functions
In auditing the loan portfolio of Gomti Finance Ltd, an internal auditor finds that interest on several term loans has not been serviced for over 90 days, yet the loans are still classified as standard and interest income continues to be accrued. What is the main risk to report?
The main risk is overstated income and understated provisioning. Loans with interest overdue beyond 90 days are generally non-performing under prudential norms, so income recognition should stop and provisions be made. Keeping them as standard inflates profit and hides credit risk.
- AOverstatement of income and understatement of provisioning due to misclassification of non-performing assetsCorrect
- BUnderstatement of share capital
- COverstatement of cash in hand
- DExcess depreciation on loan assets
Explanation
Under prudential norms, interest or principal overdue beyond 90 days generally makes the account non-performing, stopping income accrual and requiring provisions. Continuing as standard inflates income and reduces provisions, misstating profit.
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