Page 158 - CA Inter MCQ Book

CA RAVI TAORI CA INTER AUDIT MCQs

The team also verified system of branch prior to sanction of advances like verifying creditworthiness of
borrower etc. It was also verified whether there exists system for bringing to the notice of higher
authorities, accounts which exceed the sanctioned limits or drawing power. Besides, the team also
verified whether there exists a system for review of operations in accounts once a year and more
frequently in case of large advances.

During the course of audit, it was noticed that one advance, consisting of a term loan, having
outstanding balance of ` 20 crore as on balance sheet date has been guaranteed by Uttar Pradesh
government. The interest of term loan has remained overdue for more than 90 days. The branch has
classified advance as non-performing asset and made applicable provision and reversed unrealized
income. Rohan is perplexed as to whether classification, provisioning and reversal of unrealized income
made by branch is proper.

The auditee branch is a CBS branch and uses FINACLE software. The core banking system (CBS) is the set
of basic software components that manage the services provided by a bank to its customers through its
branches. The bank's customers can execute their transactions from any branch, ATM, Service Outlets,
Internet, Phone at their disposal. It helps banks to reduce risk that can result from manual data entry
and out of date information. It also helps banks to improve service delivery quality and time to its
customer. The software is accessed from different branches of bank via communication lines like
telephones, satellite , internet, etc.

The engagement team has kept record of audit documentation in accordance with SA 230.
I. Which of the following does not constitute “Other income” in the profit and loss account of branch of
a bank?
(a) Discount on Bills purchased
(b) Commission on Bills sent for collection
(c) Loan processing fees
(d) Credit card fees
II. Identify what the engagement team is trying to do in respect to advances of the branch.

(a) The engagement team is carrying out analytical procedures in respect of advances.
(
(c) The engagement team is evaluating internal control over advances.
(d) The engagement team is trying to select samples for verification of advances.

III. Considering state government guaranteed advance of `20 crore and its NPA classification made by
branch, which of the following statements is most appropriate?
(a) The branch has correctly classified account as NPA and has rightly made provisioning and reversal
of unrealized income in this regard. Uttar Pradesh government guarantee has no effect on
provisioning and income recognition.
(b) The branch has correctly classified account as NPA and has rightly made provisioning. However,
unrealized income should not have been reversed due to Uttar Pradesh government guarantee.
(c) The branch should have classified account as Standard asset due to Uttar Pradesh government
guarantee without having recourse to provisioning and reversal of unrealized income.
(d) The branch should have classified account as Standard asset due to Uttar Pradesh government
guarantee. No provisioning is required. However, for purposes of income recognition, it should
be treated as NPA and unrealized income should be reversed.
IV. The branch is operating in CBS environment. In view of above, which of the following
statements is most appropriate?
(a) Due to CBS environment, substantive procedures alone are effective to reduce audit risk to an
acceptably low level.
(b) In CBS environment, in most situations, the auditors’ ability to reduce audit risk to an
acceptably low level would be affected by the internal control systems established by the
management.

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