Page 289 - CA Final PARAM Digital Book.

QNO Gross NPA and Net NPA- Case Old Course – (N23R)
488.700 TITANIUM CNO -- Unique
PQS & Associates are one of the joint auditors of KNO Bank for the year 2022-23. While auditing KNO
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
BBI Bank 55,000 13,000 1.72%
DAB Bank 45,000 10,000 2.34%

CNI Bank 55,000 18,000 2.65%
KNO Bank 28,000 6,500 3.97%
BRB 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 KNO Bank, what inference would you draw
by comparing the “Ratio of net NPAs to net advances” with other public sector banks?

Answer 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 KNO Bank as compared to other public sector
banks. It shows that there is a risk that the bank could 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.

QNO Stock Audit issues New Course – (SM23)
489.100 TITANIUM CNO -- Unique
CA. Seema is appointed as stock auditor of Bhawani Rice Mills Pvt. Ltd. availing credit facilities from R.K.
Puram Branch, Near Tamil Educational Society, New Delhi.

The borrower is enjoying cash credit limit of ₹ 12 crore from branch against security of paid stocks and
debtors up to 90 days against margin of 25%. She proceeds to visit premises of Bhawani Rice Mills Pvt.
Ltd. located on outskirts of Delhi. She verifies books of accounts and stock records of the company and
also test checks quantity of paddy and rice of 20000 quintals and 8000 bags lying in premises of the
company. Drawing power of ₹ 12.05 crore is computed in stock audit report and report stands submitted
to bank.

After about a week, regular internal inspector appointed by Inspection department of bank also
happened to visit premises of the borrower and found that rice contained in about 5000 bags included in
stocks having approx. value of ₹ 1.50 crore was fungus ridden. The company was holding this stock for
last 15 months.

How do you view the above situation? Discuss
Answer Professional Work Not Diligent:
The above situation reflects that professional work of stock audit was not performed diligently by stock
auditor. It is one of the important responsibilities of stock auditor to verify condition of stocks. The auditor’s
role is not limited to verify physical quantities only.
Responsibility to Verify Stocks:
In given case, she should have got opened rice bags on test check basis. In the process, she could have come
to know about fungus ridden condition of rice. Value of such rice should have been excluded while arriving
at value of stocks for purpose of computation of drawing power.
Failure in Diligent Performance:
It shows that she has failed to perform her work diligently and drawing power calculated in the report
submitted to bank is not proper.

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