Page 278 - CA Final PARAM Digital Book.

advances to large corporates. Since last one year, many large accounts have become Non-Performing
Asset (NPA) as per guidelines. The Management of the Bank decided to sell one of the NPA account and
consequently one NPA namely DEF Ltd. amounting to Rs. 10.00 Crores was sold to Asset Reconstruction
Company. What audit points CA K should keep in mind while doing audit of this transaction?
OR
During the bank audit AB & Co. a new Chartered Accountant firm, observed the sale/purchase of NPAs.
Please help them by narrating the aspects, relating to sale/purchase of NPAs, to be considered.
OR
In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its non-performing
assets. Draft the points of audit check that are very relevant to this area of checking.
Answer ➢ In case of a sale/ purchase of NPAs by the bank, the auditor should examine the policy laid down
by the Board of Directors in this regard relating to procedures, valuation and delegation of powers.

• Sale
In case of sale of an NPA, the auditor should also ensure that:
• only such NPA has been sold which has remained NPA in the books of the bank for at
least 2 years.
• the NPA has been sold at cash basis only.
• the assets have been sold/ purchased “without recourse‟ only.
• subsequent to the sale of the NPA, the bank does not assume any legal, operational or
any other type of risk relating to the sold NPAs.
• on the sale of the NPA, the same has been removed from the books of the account.
• the short fall in the net book value has been charged to the profit and loss account.
• where the sale is for a value higher than the NBV, no profit is recognised, and the excess
provision has not been reversed but retained to meet the shortfall/ loss on account of
sale of other non-performing financial assets.
• Purchase
Similarly, in case of purchase of NPAs, the auditor should verify that:
• the bank has not purchased an NPA which it had originally sold.
• the NPA purchased has been subjected to the provisioning requirements appropriate to
the classification status in the books of the purchasing bank.
• any recovery in respect of an NPA purchased from other banks is first adjusted against
its acquisition cost and only the recovered amount in excess of the acquisition cost has
been recognised as profit.
• for the purpose of capital adequacy, banks have assigned 100% risk weights to the NPAs
purchased from other banks.

QNO (Income, CASE) Advances Old Course – (M13E, SM17, PM17, M18M, M19M, N19R, M20R, SM21,
458.010 TITANIUM CNO—Unique M21M, M23M)

In course of audit of Good Samaritan Bank as at 31st March 15 you observed the following:
In a particular account there was no recovery in the past 18 months. The bank has not applied the NPA
norms as well as income recognition norms to this particular account. When queried the bank

management replied that this account was guaranteed by the central government and hence these
norms were not applicable. The bank has not invoked the guarantee. Please respond. Would your
answer be different if the advance is guaranteed by a State Government?
Answer Part I -- Relevant Laws
▪ Classification of Government Guaranteed Advances

Part II -- Requirements of Relevant Laws
➢ If a government guaranteed advance becomes NPA, then for the purpose of income recognition,
interest on such advance should not to be taken to income unless interest is realized. However, for
purpose of asset classification, credit facility backed by Central Government Guarantee, though
overdue, can be treated as NPA only when the Central Government repudiates its guarantee,
when invoked.

Part III – Case Discussion
➢ In the above case, Since the bank has not revoked the guarantee, the question of repudiation does

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