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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing advances of a commercial bank, CA Rohan finds that a term loan to Sundaram Textiles has had its interest remain overdue for more than 90 days as at the balance sheet date. The bank's branch continues to recognise interest on this account as income on an accrual basis. What is the appropriate audit response?

The auditor should insist that the account be classified as a non-performing asset because interest is overdue beyond 90 days, with unrealised interest reversed and income recognised only on receipt. Security cover does not prevent NPA classification, and a note alone does not correct overstated income.

  1. AAccept the treatment because the loan is fully secured by mortgage of the factory
  2. BTreat the account as a non-performing asset under RBI norms, reverse the unrealised interest and ensure income is recognised only on a cash basis, adjusting or reporting if the bank does not do soCorrect
  3. CDefer the issue because NPA classification applies only when principal is overdue for 180 days
  4. DRecognise the interest as income and merely add a note to the financial statements

Explanation

Under RBI prudential norms, a term loan with interest overdue for more than 90 days is an NPA. Income on NPAs is recognised only when actually received, so accrued interest must be reversed. Security does not change the classification, and a mere note does not cure misstatement of income.

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