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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing Konkan Bank's advances, auditor CA Rohit finds a term loan of ₹80 lakh where interest has remained overdue for more than 90 days as at the balance sheet date, and the bank has still recognised the interest as income on accrual. Which audit response is most appropriate under the RBI prudential norms applied in bank audits?

The auditor should require the account to be classified as a non-performing asset because interest is overdue beyond 90 days, and unrealised interest booked on accrual must be reversed. Income from NPAs is recognised only on receipt, and security does not change this classification.

  1. AAccept the accrual since the loan is secured by mortgage of property
  2. BInsist that the account be classified as NPA, interest income not be recognised on accrual basis, and any unrealised interest already booked be reversedCorrect
  3. CIgnore it because only principal overdue matters for classification
  4. DDefer the matter to the next year's audit as the loan is a term loan

Explanation

Under RBI income recognition and asset classification 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 prevent NPA classification; distractor 1 ignores this.

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