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CA Intermediate · Auditing and Ethics · Audit of Banks

Sagar Bank's statutory auditor is verifying the bank's investments portfolio classified as Held to Maturity (HTM). Which procedure best addresses the risk that securities were transferred between categories to window-dress profits?

The best procedure is to examine the board-approved policy and records of inter-category transfers, checking timing, valuation as per RBI norms and provisioning of loss. Physical existence or interest confirmation does not test classification risk, which is the main window-dressing concern here.

  1. AVerify only that the securities physically exist with the custodian at year end
  2. BExamine the board-approved policy and records of any inter-category transfers, checking that transfers were made at the permitted times, at the lower of acquisition cost or book value or market value as per RBI norms, and that the resulting loss was provided forCorrect
  3. CConfirm the total interest income on HTM securities with the issuer
  4. DReview the bank's annual report for the chairman's statements on investment policy

Explanation

Window-dressing through shifting between categories is addressed by examining the transfers against the board-approved policy and RBI norms on timing and valuation, including provisioning for any loss. Existence checks and interest confirmations do not test the classification risk, and a chairman's statement is not audit evidence of compliance.

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