Page 317 - CA Inter Audit PARAM

CA Ravi Taori
Mr. Piyush, the Bank Manager develops controls to aid in managing key business and financial risks. Discuss
the various requirements for an effective risk management system in a bank
Answer Understanding the Risk Management Process: Management develops controls and uses performance
indicators to aid in managing key business and financial risks. An effective risk management system in a
bank generally requires the following:

(i) Oversight and involvement in the control process by those charged with governance: Those
charged with governance (Board of Directors/Managing Director) should approve written risk
management policies. The policies should be consistent with the bank’s business objectives and
strategies, capital strength, management expertise, regulatory requirements and the types and
amounts of risk it regards as acceptable.

(ii) Identification, measurement and monitoring of risks: Risks that could significantly impact the
achievement of bank’s goals should be identified, measured and monitored against pre-
approved limits and criteria.

(iii) Control activities: A bank should have appropriate controls to mitigate its risks including
effective segregation of duties (particularly between front and back offices), accurate
measurement and reporting of positions, verification and approval of transactions,
reconciliation of positions and results, setting up limits, reporting and approval of exceptions,
physical security and contingency planning.

(iv) Monitoring activities: Risk management models, methodologies and assumptions used to
measure and mitigate risk should be regularly assessed and updated. This function may be
conducted by the independent risk management unit.

(v) Reliable information systems: Banks require reliable information systems that provide
adequate financial, operational and compliance information on a timely and consistent basis.
Those charged with governance and management require risk management information that is
easily understood and that enables them to assess the changing nature of the bank’s risk profile.

QNO NPA (Reversal of Income) Old Course — (SM17/SM20/SM21/M20R)
BA.05 Bhaskar CNO - BA.360 New Course -- (SM25/M24R)
Write a short note on reversal of income under bank audit.
OR
In view of the significant uncertainty regarding ultimate collection of income arising in respect of non-
performing assets, the guidelines require that banks should not recognize income on non-performing assets
until it is actually realised. When a credit facility is classified as non-performing for the first time, interest
accrued and credited to the income account in the corresponding previous year which has not been realized
should be reversed or provided for. This will apply to Government guaranteed accounts also. Analyse and
Explain.
OR
While conducting statutory audit of branch of a nationalized bank, it is noticed by CA Z that credit facilities
granted to a borrower consisting solely of term loan have been classified as “Sub-standard Asset” during the
year 2022-23 due to failure of borrower to pay EMIs on time. Such EMIs were outstanding for more than 90
days and account was, therefore, classified as “Sub-Standard Asset”. CA Z has also agreed to above asset
classification made by branch management.

What are CA Z’s responsibilities regarding verification of compliance with income recognition norms by
branch in respect of above credit facilities?
Answer  Reversal of Interest Income for First Time NPAs / Effect on Other Incomes / Ways of
Accounting to give Effect of Reversal
 If any advance, including bills purchased and discounted, becomes NPA as at the close of any
year, the entire interest accrued and credited to income account in the past periods, should
be reversed or provided for if the same is not realized. This will apply to Government
guaranteed accounts also.
 In view of the significant uncertainty regarding ultimate collection of income arising in respect
of non-performing assets, the guidelines require that banks should not recognize income on

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