CA Intermediate · Auditing and Ethics · Audit of Banks
While auditing an advances portfolio, the auditor of a bank finds that a large cash credit account shows drawings consistently at the sanctioned limit, and the stock statements submitted by the borrower have not been updated for several months. Which audit procedure is the most relevant to assess whether the account is correctly classified?
The auditor should verify drawing power against current stock statements and test whether the account has regular credits sufficient to cover interest. Stale stock statements and drawings at the limit signal possible irregularity, which affects NPA classification. Checking the sanction signature, investments or vault cash does not address this.
- AVerify the borrower's current drawing power against stock statements and test whether the account is regularly credited with sufficient funds to cover interestCorrect
- BConfirm only that the sanction letter was signed by the competent authority
- CCheck that the bank's investment portfolio is valued at market price
- DVerify the cash balance held in the branch vault
Explanation
For cash credit accounts, the key tests are whether the outstanding is within drawing power based on current stock statements and whether the account shows regular credits covering interest. An account with outdated stock statements or outstanding beyond drawing power may become irregular and eventually an NPA. The other options do not address the classification risk of this account.
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