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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing Kaveri Bank's advances, auditor CA Rohan finds that a term loan of ₹2 crore to a manufacturing unit has had interest unpaid and overdue for more than 90 days as at the balance sheet date. The bank continues to recognise the interest as income on an accrual basis. What is the most appropriate audit response?

The loan is a non-performing asset because interest has been overdue for more than 90 days, so under RBI prudential norms interest on it should be recognised only when actually received. The auditor should challenge the accrual of interest income and the standard classification.

  1. AAccept the treatment because interest accrued on a secured loan is always income
  2. BReport that the account is a non-performing asset under the RBI prudential norms, and interest income should not be recognised on accrual basis but only when actually receivedCorrect
  3. CAsk the bank to recognise the interest in the next year when it is recovered, while treating the loan as standard
  4. DIgnore the issue because asset classification is the RBI's matter and not the auditor's

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 on realisation, so accrual of interest overstates income. Auditor should verify the classification and challenge the accrual, since asset classification and income recognition are within audit scope.

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