RML & Associates are one of the joint auditors of IND Bank for the year 2022-23. While auditing IND Bank, they are analysing industry data…
CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · May 2024
RML & Associates are one of the joint auditors of IND Bank for the year 2022-23. While auditing IND Bank, they are analysing industry data relating to NPAs in select public sector banks as part of risk assessment procedures: Name of Bank Gross NPAs (in ₹ crore) Net NPAs (in ₹ crore) Ratio of Net NPAs to Net advances BIC Bank 55,000 13,000 1.72% ABD Bank 45,000 10,000 2.34% RIN Bank 55,000 18,000 2.65% IND Bank 28,000 6,500 3.97% CRB Bank 35,000 8,800 2.27% In the above context, what do you understand by “Gross NPAs” and “Net NPAs” as on reporting date in the context of financial statements of a Bank? As an auditor of IND Bank, what inference would you draw by comparing the “Ratio of net NPAs to net advances” with other public sector banks?
Suggested Answer and Working Notes:
Gross NPAs represent opening balances of NPAs as increased by fresh NPAs during the year and reduced by upgradations, recoveries and write-offs during the year. Net NPAs are arrived at after deducting amounts on account of the total provision held against NPAs, balance in the interest suspense account to park accrued interest on NPAs and certain other adjustments. The Net NPAs to Net advances ratio is higher in the case of IND Bank as compared to other public sector banks. This indicates that there is a risk that the bank may not have made the required provisions in accordance with RBI guidelines. A higher net NPAs to Net advances ratio indicates the probability and risk of under-provisioning. Keeping in view the above, audit procedures have to be tailored towards the examination and verification of this crucial area.
Topics: Special Features of Audit of Banks & Non-Banking Financial Companies
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