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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing Kaveri Bank Ltd, the auditor notes that a term loan account of Rs 80 lakh to a manufacturing firm has had interest overdue for more than 90 days as at the balance sheet date. The bank continues to recognise interest on this account as income and classifies it as a standard asset. What is the most appropriate audit response?

The account should be classified as an NPA because interest has been overdue for more than 90 days. Unrealised interest income must be reversed and provision made under RBI norms. If management does not correct this, the auditor should modify the audit opinion.

  1. AAccept the treatment since the principal is not overdue
  2. BTreat the account as a Non-Performing Asset under RBI prudential norms, require reversal of unrealised interest income, and make provision as per norms, modifying the report if not doneCorrect
  3. CAsk the bank to disclose the matter only in the Board's report
  4. DAsk the bank to recognise interest only when the borrower pays, but retain the standard classification

Explanation

Under RBI income recognition and asset classification norms, a term loan with interest overdue for more than 90 days is an NPA. Interest on NPAs is not recognised as income unless actually received, and unrealised interest previously booked is reversed. Provision must also be made as required. If management refuses, the auditor should modify the opinion. Keeping the standard classification is incorrect.

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