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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing the advances portfolio of Sagar Bank Ltd, CA Meera finds a cash credit account of a borrower, Kaveri Textiles, where the account has remained 'out of order' because the outstanding balance has stayed continuously above the sanctioned limit for more than 90 days with no regular credit. Under the prudential norms of RBI that auditors are expected to check, what is the correct audit response?

The account should be classified as a non-performing asset, because an out-of-order cash credit account beyond 90 days meets the RBI criteria. The auditor should then verify that interest income is not recognised on it and that the required provisions are made. Security cover does not change the classification.

  1. AClassify the account as a non-performing asset and verify that interest has not been recognised as income and that required provisioning is madeCorrect
  2. BTreat the account as a standard asset because the borrower is still operating the account
  3. CTreat the account as standard if the security value exceeds the outstanding, whatever the period of irregularity
  4. DLeave classification to the borrower's management since NPA status is not an audit matter

Explanation

Under RBI norms, a cash credit account is out of order if the outstanding stays continuously in excess of the sanctioned limit or drawing power, or there are no credits for the prescribed period, and it becomes NPA after the 90-day criterion. Classification is driven by the repayment and irregularity status, not by security value, and the auditor must check non-recognition of interest income and provisioning.

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