Agrim, a CA student, is part of an engagement team conducting audit of Madurai branch of ARB Bank. CA Bhuvan, engagement partner, has asked him to…

The auditor is required to ensure that provision for NPA is made as per its classification in different categories which are given as under: Categories of Non-Performing Assets: Provision required Substandard Assets: Would be one, which has remained NPA for a period less than or equal to 12 months. 15% Doubtful Assets: Would be one which has remained in the substandard category for a period of 12 months. Sub-categories: Doubtful up to 1 Year (D1) Doubtful 1 to 3 Years (D2) Doubtful more than 3 Years (D3) (Secured + Unsecured) 25% + 100% 40% + 100% 100% + 100% 100% Loss Assets 100% From the above provision, it can be concluded that in case of: AK Industries - It has been classified as Doubtful (D1) category. Therefore, it requires provision of 25% of secured amount. That is provision of 2.50 lakh (i.e 25% of 10lakh) should be made instead of 5lakh. Jupiter Traders - It has been classified as Substandard asset. It requires provision of 15% of outstanding amount (i.e 15% of 50lakhs) which comes to 7.50 lakh. Therefore, provision made by the branch is correct. VT & Co. - It has been classified as Doubtful (D2) category. It requires provision of 40% of secured amount. That is provision of 12.00 lakh (40% of 30lakhs) should be made instead of 30lakh. ASD & Sons - It has been classified as a loss asset which requires provision of 100% of outstanding amount. Therefore, the provision made by the branch is correct. Classification as NPA should be based on the record of recovery. Availability of security or net worth of borrower/guarantor is not to be taken into account for purpose of treating an advance as NPA or otherwise. Hence, these accounts have been classified as NPA on the record of recovery although these are fully secured or guaranteed.