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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing Lakshmi Vilas Nagar Bank's advances at a branch, the auditor notices that a cash credit account has remained 'out of order' because the outstanding balance has continuously exceeded the sanctioned limit for more than 90 days, with credits during the period being less than the interest debited. How should the account be treated for asset classification?

The account should be classified as a non-performing asset. Under prudential norms a cash credit account is out of order when the outstanding exceeds the limit continuously or credits during the period do not cover the interest debited, for more than 90 days, so it cannot remain standard.

  1. AAs a standard asset, since the borrower still makes some credits
  2. BAs a non-performing asset, because the account has remained out of order and interest has not been serviced by the credits for over 90 daysCorrect
  3. CAs a restructured asset by default, with no further provisioning needed
  4. DAs a standard asset, if the borrower provides a verbal assurance of repayment

Explanation

Under prudential norms, a cash credit account is out of order if the balance remains continuously in excess of the limit or drawing power, or if there are no credits for 90 days or credits are not enough to cover interest debited. Such an account is an NPA. Credits smaller than the interest debited do not save it.

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