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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing Sahyadri Urban Bank's advances portfolio, the auditor finds that a cash credit account has remained 'out of order' because the outstanding balance has exceeded the sanctioned limit continuously for more than 90 days at the balance sheet date. The bank's management has classified it as a standard asset because the borrower has promised to deposit funds next month. What is the most appropriate audit response?

The auditor should require the account to be classified as non-performing and provisioned. An account out of order for over 90 days at the balance sheet date is an NPA under prudential norms, and a borrower's future promise or later deposit does not alter the position at that date.

  1. AAccept the standard classification because a promise by the borrower indicates recoverability
  2. BTreat the account as non-performing under the prudential norms and require the bank to classify it and provide accordinglyCorrect
  3. CIgnore classification and only ask for additional disclosure in the notes to accounts
  4. DAccept the classification if the borrower deposits funds after the balance sheet date

Explanation

Under the income recognition and asset classification norms, a cash credit account is non-performing if it stays out of order, i.e. outstanding exceeds the sanctioned limit or drawing power continuously for more than 90 days. A promise of future payment, or a deposit after the balance sheet date, does not change the status at the reporting date. Disclosure alone would leave the provision and income reversal unrecorded.

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