During the statutory branch audit of ABC Bank for the financial year ended March 31, 2026, you are reviewing the credit portfolio of the Corporate…

CA Final · Advanced Auditing, Assurance and Professional Ethics · PYQS · May 2026
During the statutory branch audit of ABC Bank for the financial year ended March 31, 2026, you are reviewing the credit portfolio of the Corporate Banking division. One significant exposure involves G-Mart Ltd., which was granted a working capital credit limit of 100 lakh on September 1, 2023. According to the bank's internal policy and regulatory norms, these limits were due for a comprehensive renewal on September 1, 2025. Upon scrutiny, you observe that as of March 31, 2026, the formal renewal had not been executed, despite more than 180 days having elapsed since the due date. The Branch Manager contends that the account is "perfectly healthy", noting that the balance has remained within the sanctioned Drawing Power, interest has been serviced promptly, and the account shows high turnover. The delay is attributed to the sudden demise of G-Mart Ltd.'s statutory auditor, which stalled the finalization of audited financial statements required for renewal. A letter dated February 15, 2026, from the client confirms that a new auditor was appointed and the audited financial statements were finally submitted on April 10, 2026, and the bank issued the formal renewal letter on April 12, 2026, prior to the signing of your branch audit report. Your audit assistant argues that because the 180-day grace period expired during the financial year without a formal renewal, the account's status is non-negotiable and must be downgraded to NPA. As the Statutory Branch Auditor, how should you evaluate the asset classification of G-Mart Ltd.'s account for the year ended March 31, 2026?
(A) Classify as NPA, the 180-day grace period from the due date expired prior to the balance sheet date, making the account technically irregular regardless of the reason for delay.
(B) Classify as NPA; it is a non-adjusting event under AS 4 "Contingencies and Events Occurring after the Balance Sheet date". There is no matter of substance over form.
(C) Classify as Standard; it is an adjusting event under AS 4 "Contingencies and Events Occurring after the Balance Sheet date". It is a matter of substance over form.
(D) Classify as NPA; however, the classification can be reversed in the same financial year's audit report if the renewal is completed before the independent auditor's report is signed.

Suggested Answer and Working Notes:

Correct Answer: Option (C)

Classify as Standard; it is an adjusting event under AS 4 "Contingencies and Events Occurring after the Balance Sheet date". It is a matter of substance over form.

Topics: Standard on Auditing (SA), Special Features of Audit of Banks & Non-Banking Financial Companies, Reporting

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