Page 322 - CA Inter Audit PARAM

CA Ravi Taori
Would be one which has remained in the (Secured + Unsecured) 25%
substandard category for a period of 12 + 100% 40% + 100% 100% +
months. 100% 100%
 Sub-categories:
Doubtful up to 1 Year (D1) Doubtful 1 to 3
Years (D2) Doubtful more than 3 Years (D3)
 Loss Assets

From the above provision, it can be concluded that in case of:

AK Industries- It has been classified as Doubtful (D1) category. Therefore, it requires provision of 25% of
secured amount. That is provision of Rs 2.50 lakh (i.e 25% of `10 lakh) should be made instead of ₹ 5 lakh.

Jupiter Traders-It has been classified as Substandard asset. It requires provision of 15% of outstanding
amount (i.e 15% of ₹ 50 lakhs) which comes to ₹ 7.50 lakh. Therefore, provision made by the branch is
correct.

VT & Co.- It has been classified as Doubtful (D2) category. It requires provision of 40% of secured amount.
That is provision of ₹ 12.00 lakh (40% of ₹ 30 lakhs) should be made instead of ₹ 30 lakh.

ASD & Sons- It has been classified as a loss asset which requires provision of 100% of outstanding amount.
Therefore, the provision made by the branch is correct.

Classification as NPA should be based on the record of recovery. Availability of security or net worth of
borrower/guarantor is not to be taken into account for purpose of treating an advance as NPA or otherwise.
Hence, these accounts have been classified as NPA on the record of recovery although these are fully secured
or guaranteed.

QNO— Provision for NPA in Doubtful Category New Course – (N23M/M24R)
BA.09.20 Bhaskar CNO - Unique
While verifying provisions of advances of a branch of MCO Bank as part of statutory branch audit, CA Z
notices that credit facilities consisting of term loan to KRT Enterprises have been classified under
doubtful asset (D1) category.

The outstanding balance in above term loan account as on 31.3.2023 is ₹ 50 lakhs. Value of security held
in account is ₹ 40 lakhs. The branch has made provision of ₹ 7.50 lakhs. Is provision made by branch
proper? Discuss.
Answer The provision for advances falling in D1 category is required @ 25% of secured portion and 100% of
unsecured portion. Therefore, provision in above case is arrived as under: -
Outstanding balance as on 31.3.23 ₹ 50 lakhs
Less: Value of security ₹ 40 lakhs
Unsecured portion ₹ 10 lakhs
Therefore, outstanding balance of ₹ 50 lakhs is secured to the tune of ₹ 40 lakhs and balance ₹ 10 lakhs is
unsecured.
Provision calculation.
25% of secured part i.e., 25% of ₹ 40 lakhs ₹ 10 lakhs
100% of unsecured part i.e.,100% of `10 lakhs ₹ 10 lakhs
Required provision ₹ 20 lakhs
Therefore, provision made by branch is not proper. It should have made provision of ₹ 20 lakhs instead of
₹ 7.50 lakhs

QNO Special Mention Accounts (SMA) Old Course-- (N22R)
BA.09.50 Bhaskar CNO - BA.240
CA. Puranjay is appointed as statutory branch auditor of two branches of a nationalized bank for year
2021-22. During the course of audit, he came across the following:

a. While verifying advances of one semi-urban branch, he noticed substantial number of accounts
categorized as SMA (Special mention accounts). In this context, explain the nature and
significance of SMA.
www.auditguru.in 10.9