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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing a nationalised bank branch, the statutory branch auditor of Nagpur Main Branch finds that the branch has reported an advance as a standard asset although the borrower's account has remained out of order and no interest has been serviced for more than 90 days. Under the RBI prudential norms that the auditor must test, what is the correct audit response?

The auditor should examine whether the account must be classified as a non-performing asset, because interest overdue for more than 90 days triggers NPA status regardless of security. Income recognition and provisioning must then be adjusted. Adequate security does not justify keeping the account as standard.

  1. AAccept the classification because the borrower has adequate security
  2. BCheck whether the account should be classified as a non-performing asset and whether income recognition and provisioning have been adjusted accordinglyCorrect
  3. CIgnore the matter since classification is decided only by the head office
  4. DAsk the branch to reverse the advance entirely from the books

Explanation

Under the prudential norms, an account where interest or instalment remains overdue for more than 90 days is treated as an NPA irrespective of security available. The auditor must verify classification, reversal or non-recognition of interest income, and provisioning. Accepting standard classification because of security is wrong, as security does not override the 90-day overdue test.

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