CA Intermediate · Auditing and Ethics · Audit of Banks
While auditing a nationalised bank branch, auditor Rohan notes that a term loan account of Vijay Textiles has had interest overdue for more than 90 days, and the account has not been classified as NPA. The branch manager states that the borrower will pay next month. What is the most appropriate audit response?
The auditor should treat the account as an NPA because interest has been overdue for more than 90 days under RBI prudential norms. A promise of future payment is irrelevant. The auditor should check provisioning and income reversal and report any material uncorrected shortfall.
- AAccept the management's statement since repayment is expected shortly
- BTreat the account as NPA as per the RBI prudential norms, test the required provisioning, and report the shortfall in income recognition and provisioning if not correctedCorrect
- CWait until the next year's audit to see whether the borrower pays
- DIgnore the matter since NPA classification is the sole responsibility of the RBI inspectors
Explanation
Under RBI prudential norms, an account with interest or principal overdue for more than 90 days is an NPA. Expected future payment does not change the classification. The auditor should evaluate classification, provisioning and income reversal, and modify the report if the misstatement is material and uncorrected.
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