Test 5: answer key

Question 1 · 2 marks · Chapter 5: Audit of Items of Financial Statements · medium

Scenario. Titan Infra Ltd. is constructing an integrated plant. At 31 March 2026, CWIP includes Project A aged 3.5 years and shown as temporarily suspended for 14 months pending a permit; its cost has exceeded the approved estimate by 28%, and revised forecasts raise a possible impairment concern. Project B is overdue for completion and has also exceeded its original cost. The project controller is required to review a monthly CWIP ageing and exception report. Two land title deeds are in a promoter's name rather than the company's name. During the year, one PPE class was revalued upward by 12% through a valuer who is not a Registered Valuer. Borrowing costs were incurred during a five-month labour stoppage when no active technical or administrative development work continued.

Titan's project controller is required to review the monthly CWIP ageing report and document follow-up on exceptions. Which procedure is principally a test of the operating effectiveness of that control, rather than a test of details of the CWIP balance?

1. Inspect monthly CWIP reports for review sign-offs, evidence of challenge, and documented resolution of exceptions. (correct answer)
2. Recalculate project costs from contracts, invoices, and receipt records to substantiate the CWIP balance at year-end.
3. Inspect construction sites and match identified structures and equipment to the fixed-asset register at year-end.
4. Trace CWIP ledger balances to invoices, payment records, and project-wise cost schedules at year-end.

Answer: A — Inspect monthly CWIP reports for review sign-offs, evidence of challenge, and documented resolution of exceptions.

Working. 1. Identify the relevant control: monthly review of the CWIP ageing report. 2. Select instances across the period, not merely the year-end report. 3. Inspect dated review evidence and the reviewer's challenge of exceptions. 4. Trace exceptions to documented follow-up and resolution. This tests operating effectiveness; invoice tracing and physical inspection are tests of details.

Explanation. A test of controls evaluates whether the prescribed review was actually performed and operated effectively. The auditor should select reports from different months, inspect evidence identifying the reviewer and timing, and check whether exceptions were investigated and resolved. Option (b) is a substantive test of details because it supports the recorded cost and classification of CWIP; it does not establish that the monthly review control operated.

Where it goes wrong. Confusing inspection of underlying transactions and balances with testing whether a control operated throughout the period.

Authority. SA 330, paras 8-10: Tests of controls; SA 500, para 6: Designing and performing audit procedures; ICAI Study Material, Chapter 4, section on tests of controls and substantive procedures; ICAI Study Material, Chapter 5, section 3.7: Audit procedures for PPE

Question 2 · 2 marks · Chapter 5: Audit of Items of Financial Statements · hard

Project A has remained suspended for 14 months, is more than three years old and has exceeded its original cost estimate. Which is the most appropriate audit response to the CWIP ageing and impairment risk?

1. Write off every CWIP balance older than three years because ageing alone automatically establishes impairment.
2. Assess impairment indicators, test recoverable-amount estimates, and check the required ageing and completion schedules. (correct answer)
3. Retain all CWIP at cost until commissioning because impairment testing starts only after completion.
4. Transfer suspended CWIP to inventory and recognise a loss only after formal project abandonment.

Answer: B — Assess impairment indicators, test recoverable-amount estimates, and check the required ageing and completion schedules.

Working. 1. Verify the CWIP ageing and identify the suspended project separately. 2. Compare current cost and expected completion with the approved plan. 3. Evaluate management's impairment indicators, assumptions and recoverable-amount estimate. 4. Compare recoverable amount with carrying amount and assess any required write-down. 5. Check the ageing and completion disclosures.

Explanation. Age, suspension and cost overrun are facts requiring the auditor to investigate whether impairment indicators exist and to evaluate management's recoverable-amount assessment under AS 28. The auditor should also check the CWIP ageing schedule and, where completion is overdue or cost has exceeded the plan, the completion schedule. Option (a) is incorrect because an ageing bucket is a disclosure requirement, not an automatic rule requiring the entire balance to be expensed.

Where it goes wrong. Treating an ageing disclosure category as an automatic impairment or write-off threshold.

Authority. AS 28, Impairment of Assets: Assessment of impairment and recoverable amount; ICAI Study Material, Chapter 5, section 3.7: PPE impairment assessment; ICAI Study Material, Chapter 5, CWIP ageing and completion schedules, p. 5.65

Question 3 · 2 marks · Chapter 8: Audit Report · hard

Two immovable-property title deeds are held in a promoter's name. Revaluation of one PPE class increased its aggregate net carrying value by 12%, but the valuation was not performed by a Registered Valuer. What is the appropriate CARO 2020 reporting treatment?

1. Disclose the revaluation amount only; title deeds held by promoters fall outside CARO reporting.
2. Report title deeds only when mortgaged, and accept any independent valuer for the revaluation exercise.
3. Report deeds under (i)(c); disclose the valuer deficiency and 12% class-level change under (i)(d). (correct answer)
4. Report deeds under (i)(c), but omit revaluation because its 12% class-level change is below a 15% threshold.

Answer: C — Report deeds under (i)(c); disclose the valuer deficiency and 12% class-level change under (i)(d).

Working. 1. Identify each immovable property and compare the registered title holder with the company. 2. Apply clause 3(i)(c) and provide the prescribed particulars for deeds not held in the company's name. 3. For clause 3(i)(d), check the valuer's registration status. 4. Since the class-level net carrying value change is 12%, specify the amount of change.

Explanation. Clause 3(i)(c) requires particulars when title deeds of immovable properties disclosed in the financial statements are not held in the company's name, subject to the stated lease exception. Clause 3(i)(d) requires reporting whether revaluation was based on a Registered Valuer and specifying the amount of change when it is 10% or more in the aggregate net carrying value of a class. Option (d) invents a 15% threshold and is therefore incorrect.

Where it goes wrong. Replacing the prescribed 10% class-level revaluation threshold with an assumed threshold, or overlooking title deeds held by promoters.

Authority. CARO 2020, paragraph 3(i)(c): Title deeds of immovable properties; CARO 2020, paragraph 3(i)(d): Revaluation of PPE and intangible assets; ICAI Study Material, Chapter 8, CARO reporting on PPE, p. 8.74

Question 4 · 2 marks · Chapter 5: Audit of Items of Financial Statements · hard

The integrated plant is a qualifying asset, and Titan incurred borrowing costs during a five-month labour stoppage. No physical construction, technical work or administrative development activity continued during the stoppage. How should borrowing costs for that extended interruption be treated under AS 16?

1. Capitalise interest throughout because physical construction had commenced before the labour interruption.
2. Expense borrowing costs from drawdown, including amounts incurred while active construction is proceeding.
3. Continue capitalisation because every delay in construction is automatically treated as a temporary interruption.
4. Suspend capitalisation during the extended interruption and resume it when active preparation restarts. (correct answer)

Answer: D — Suspend capitalisation during the extended interruption and resume it when active preparation restarts.

Working. 1. Confirm that the plant is a qualifying asset. 2. Check that expenditure, borrowing costs and preparatory activities were being incurred before the stoppage. 3. Identify the five-month extended interruption with no active development. 4. Suspend capitalisation for that interval. 5. Resume only when active development recommences.

Explanation. AS 16 requires capitalisation to be suspended during extended periods in which active development is interrupted. The facts specify a five-month stoppage with no substantial technical or administrative work, so borrowing costs during that interval are costs of holding a partially completed asset and do not qualify for capitalisation. Option (c) is incorrect because capitalisation continues only for qualifying temporary delays or periods when substantial technical or administrative work is being carried out.

Where it goes wrong. Assuming that once capitalisation begins it continues automatically through every construction delay.

Authority. AS 16, paras 14-16: Commencement of capitalisation; AS 16, paras 17-18: Suspension of capitalisation; AS 16, paras 19-22: Cessation of capitalisation

Question 5 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. Riverside District Co-operative Credit Society is examined under statutory audit under the applicable State Co-operative Societies Act, Rules and registered bye-laws. The Registrar has prescribed the criteria for audit grading. The loan ledger includes debts overdue for eight months and debts overdue for more than five years; the society has neither assessed recovery prospects nor made specific doubtful-debt provisions. It has also advanced funds to a non-member individual despite a governing restriction on such lending, and invested part of its funds in ordinary shares of a private trading company outside the investment channels permitted by its governing provisions.

Which audit approach is most appropriate for Riverside Society's audit grading, overdue debts, loan to a non-member and investment outside the permitted channels?

1. Use Registrar criteria, assess overdue debts and provisions, and test loans and investments against the Act and bye-laws. (correct answer)
2. Grade only from current profit ratios, treat every overdue balance as irrecoverable, and accept investments whenever freely marketable without legal review.
3. Use a national grading scale, retain overdue interest as income, and approve loans based solely on security value and collateral.
4. Apply company-law grading, treat non-member loans as ordinary receivables, and assess investments only for market-price movements and liquidity.

Answer: A — Use Registrar criteria, assess overdue debts and provisions, and test loans and investments against the Act and bye-laws.

Working. 1. Obtain the applicable State Act, Rules, Registrar's grading criteria and bye-laws. 2. Apply the prescribed criteria to award the audit class. 3. Age overdue debts into the prescribed categories and assess recovery prospects and provisions. 4. Test the member-status and sanction conditions for loans. 5. Trace investments to permitted statutory or bye-law channels and report infringements.

Explanation. The audit class is awarded using criteria specified by the Registrar, not an auditor-created national scale. Overdue debts should be classified by age, including six months to five years and more than five years, then assessed for recoverability and adequate doubtful-debt provision. The auditor must also examine statutory and bye-law restrictions on loans and permitted investments. Option (b) is wrong because neither profitability alone nor marketability replaces those statutory checks.

Where it goes wrong. Assuming that every State uses a single national grading matrix or that security and marketability alone validate loans and investments.

Authority. ICAI Study Material, Chapter 9, co-operative society audit: overdue debts, audit classification, loan and investment restrictions, pp. 9.70-9.77; Applicable State Co-operative Societies Act, Rules, Registrar's grading criteria and registered bye-laws

Question 6 · 2 marks · Chapter 5: Audit of Items of Financial Statements · medium

Scenario. Orbit Components Ltd. closes its books on 31 March 2026. Supplier statements contain balances not reconciled to the accounts-payable ledger. An April bank-payment batch includes invoices for goods received before year-end, while some supplier invoices reached the accounts team only in April. For selected transactions near year-end, goods-received notes and the inward gate register establish the receipt date, and the purchase terms transfer ownership on delivery. Several suppliers are registered micro or small enterprises; some amounts were paid late during the year, while other principal and interest amounts remain unpaid.

The accounts-payable ledger reconciles to the general ledger, but the auditor is concerned that liabilities may have been omitted at 31 March. Which procedure is most directly designed to search for unrecorded liabilities?

1. Trace year-end payable balances to invoices and receipt notes to confirm that recorded liabilities exist.
2. Inspect later payments, supplier statements and unmatched receipt notes for items received before year-end. (correct answer)
3. Reconcile supplier debit balances to cash receipts and test sales returns recorded after the reporting date.
4. Inspect purchase-order approvals and infer liability completeness from management's authorisation controls, without invoice testing.

Answer: B — Inspect later payments, supplier statements and unmatched receipt notes for items received before year-end.

Working. 1. Select material payments made after 31 March. 2. Inspect the underlying invoices and goods-received notes or service evidence. 3. Determine when goods or services were received and when the obligation arose. 4. Compare supplier statements and unmatched receipts with the ledger. 5. Propose accruals for material pre-year-end obligations omitted from the accounts.

Explanation. The principal risk is understatement, so the auditor should search beyond the recorded payable ledger. Subsequent cash disbursements, supplier statements and unmatched goods-received notes can reveal obligations incurred before year-end but recorded later or omitted entirely. Option (a) primarily tests the support for liabilities already recorded and therefore addresses existence or accuracy more directly than completeness.

Where it goes wrong. Vouching recorded payables to invoices and assuming that this also detects liabilities omitted from the ledger.

Authority. ICAI Study Material, Chapter 5, section 3.9: Trade payables and other current liabilities, pp. 5.75-5.77; SA 500, para 6: Audit procedures to obtain sufficient appropriate audit evidence; SA 330, para 18: Substantive procedures for material classes of transactions and balances

Question 7 · 2 marks · Chapter 5: Audit of Items of Financial Statements · medium

A supplier delivered goods on 29 March 2026. The contract transfers ownership on delivery. The invoice, dated 30 March, was received on 7 April and recorded in April. What is the correct year-end cut-off treatment?

1. Record the purchase and payable in April because the invoice arrived after the reporting date.
2. Record the purchase in April and disclose the March receipt only as a purchase commitment.
3. Recognise the purchase and payable by 31 March because delivery transferred ownership before year-end. (correct answer)
4. Recognise the purchase only after the supplier confirms the balance following the reporting date.

Answer: C — Recognise the purchase and payable by 31 March because delivery transferred ownership before year-end.

Working. 1. Inspect the purchase contract to establish the transfer-of-ownership term. 2. Match the invoice with the 29 March goods-received note and inward gate entry. 3. Confirm that the goods were received before the reporting date. 4. Include the purchase and related payable in the year ended 31 March and check that April posting is not duplicated.

Explanation. The goods were received before 31 March and the contract transfers ownership on delivery. The obligation therefore belongs to the year ended 31 March even though the invoice entered the accounts department in April. The auditor should compare the invoice with the goods-received note and inward gate record and ensure the purchase and payable are accrued in the correct period. Option (a) incorrectly treats invoice-processing date as the recognition trigger.

Where it goes wrong. Using the date an invoice is received or entered in the system instead of the date the underlying purchase obligation arises.

Authority. ICAI Study Material, Chapter 5, section 3.9, cut-off procedures for trade payables, pp. 5.75-5.76; SA 500, para 6: Audit evidence; SA 330, para 18: Substantive procedures

Question 8 · 2 marks · Chapter 5: Audit of Items of Financial Statements · medium

The auditor sends positive balance-confirmation requests to selected suppliers under the auditor's control. Two suppliers do not respond. Which action is appropriate under SA 505?

1. Treat non-response as confirmation that no amount is payable and retain the ledger balance unchanged.
2. Obtain informal oral assurances through management and accept them as conclusive confirmation evidence.
3. Send negative confirmations and treat supplier silence as sufficient evidence for the balances.
4. Use alternative procedures, checking subsequent payments, supplier statements, invoices and receipt records. (correct answer)

Answer: D — Use alternative procedures, checking subsequent payments, supplier statements, invoices and receipt records.

Working. 1. Record the non-response and follow any required second request. 2. Select alternative evidence independently of the confirmation. 3. Trace subsequent settlement to bank records and underlying invoices. 4. Match invoices to goods-received notes and supplier statements. 5. Resolve differences and document the conclusion.

Explanation. The auditor must retain control over confirmation requests and evaluate the results. A non-response to a positive confirmation is not evidence that the balance is nil; SA 505 requires alternative audit procedures. For trade payables, subsequent payments, supplier statements, invoices and goods-received records can support the amount and period of the liability. Option (a) is the principal error because silence cannot resolve the completeness or accuracy assertion.

Where it goes wrong. Treating a supplier's failure to reply to a positive confirmation as evidence that no payable exists.

Authority. SA 505, para 7: Auditor's control over external confirmation requests; SA 505, para 12: Alternative procedures for each non-response; SA 505, para 16: Evaluation of confirmation evidence; ICAI Study Material, Chapter 5, section 3.9: Trade payables

Question 9 · 2 marks · Chapter 5: Audit of Items of Financial Statements · hard

Orbit is required to have its annual accounts examined under statutory audit and has unpaid as well as late-paid dues to micro and small enterprise suppliers. Which disclosure approach correctly addresses Section 22 of the MSMED Act, 2006 and the related Schedule III ageing presentation?

1. Show unpaid principal and interest separately, late-payment disclosures, and prescribed trade-payables ageing by supplier and dispute category. (correct answer)
2. Disclose unpaid principal only, because interest and post-appointed-day payments are generally excluded from annual accounts in every case.
3. Disclose interest paid under Section 16 only, because unpaid principal is already within trade payables.
4. Age only dues to medium enterprises, omitting unbilled amounts and disputed supplier balances from disclosure.

Answer: A — Show unpaid principal and interest separately, late-payment disclosures, and prescribed trade-payables ageing by supplier and dispute category.

Working. 1. Identify micro and small enterprise suppliers and reconcile their balances. 2. Separate principal and interest unpaid at year-end. 3. Compile the Section 22 late-payment, accrued and continuing-interest disclosures. 4. Prepare the Schedule III ageing schedule for MSME, other and disputed dues. 5. Where no due date is specified, age from the transaction date; show unbilled dues separately.

Explanation. Section 22 requires separate disclosure of unpaid principal and interest at year-end, interest paid under Section 16 together with payments made beyond the appointed day, specified delay interest, accrued unpaid interest and further interest remaining due until payment. Schedule III separately requires a trade-payables ageing schedule covering MSME, other, and disputed dues, with the prescribed age buckets. Option (b) is incomplete because the disclosure is not confined to unpaid principal at year-end.

Where it goes wrong. Confusing the Section 22 annual-account disclosures with only the closing unpaid balance, or omitting the separate Schedule III ageing schedule.

Authority. Micro, Small and Medium Enterprises Development Act, 2006, section 22; MSMED Act, 2006, sections 15, 16 and 23; Companies Act, 2013, Schedule III, Division I: Trade payables ageing schedule and MSME disclosures; ICAI Study Material, Chapter 5, MSME disclosures and trade-payables ageing, p. 5.147

Question 10 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. State Infrastructure Development Corporation is a government company. Its statutory auditor is appointed under the Companies Act provisions involving the C&AG; the C&AG may issue directions on the audit and conduct a supplementary audit. In reviewing a public project, the auditors find that expenditure on an expensive building was duly sanctioned and charged to the proper grant, but the building was unnecessary and remains unused. A separate review of project outcomes may assess economy, efficiency and effectiveness.

The C&AG's audit of a government company identifies an expensive building that was duly sanctioned and charged to the correct grant but was unnecessary and remains unused. Which statement correctly classifies the finding and summarises the constitutional and PSU audit framework?

1. It is compliance audit: Article 148 exclusively empowers Parliament to appoint the C&AG, Article 150 fixes duties, and the company appoints its auditor.
2. It is propriety audit: Articles 148–151 cover C&AG appointment, duties, account form and reporting; C&AG appoints auditors and conducts supplementary company audits. (correct answer)
3. It is performance audit: Article 149 determines account formats, Article 150 assigns audit powers, and Article 151 routes reports to the Supreme Court.
4. It is audit against funds: Article 148 concerns account formats, Article 149 appoints company auditors, and Article 151 authorises expenditure sanctions.

Answer: B — It is propriety audit: Articles 148–151 cover C&AG appointment, duties, account form and reporting; C&AG appoints auditors and conducts supplementary company audits.

Working. 1. Confirm that the corporation is a government company and identify the C&AG’s statutory role under the Companies Act, 2013. 2. Separate the audit objective from the entity’s status: an unused, avoidable building points to propriety. 3. Compliance audit would ask whether expenditure followed applicable laws, rules, orders and sanctions. 4. Performance audit would evaluate economy, efficiency and effectiveness against intended results. 5. Record that a transaction may be formally regular yet still be improper or wasteful.

Explanation. The finding concerns propriety because the building was unnecessary and remained unused, making expenditure avoidable or ineffective even if sanction and procedural compliance existed. Compliance audit tests conformity with laws, rules and orders, while performance audit examines economy, efficiency and effectiveness of programmes or projects. Articles 148–151 establish the C&AG framework: appointment and independence, statutory duties, form of accounts, and submission of reports to the appropriate legislature. For a government company, the C&AG also has statutory appointment, direction and supplementary-audit functions.

Where it goes wrong. Treating formal sanction as proof of propriety, or confusing the distinct constitutional functions in Articles 148 to 151.

Authority. Constitution of India, Articles 148-151; Companies Act, 2013, sections 139(5) and 139(7), 143(5) and 143(6); ICAI Study Material, Chapter 9, government audit, propriety audit and audit of government companies, pp. 9.11-9.20

Question 11 · 2 marks · Chapter 10: Audit of Banks · medium

Scenario. During statutory audit of Meridian Bank's cash-credit portfolio, the team samples several borrowers. For Borrower A, the balance is below the sanctioned limit and drawing power, but credits in the previous 90 days total ₹2.5 lakh against interest debited of ₹3 lakh. For Borrower B, the balance has continuously exceeded the lower of its sanctioned limit and drawing power for 92 days, although it remains within the sanctioned limit and credits cover interest. For Borrower C, the stock audit report at 31 March 2026 shows realisable stock of ₹100 lakh, including damaged or obsolete stock of ₹5 lakh and unpaid stock of ₹15 lakh; total debtors are ₹40 lakh, of which only balances up to 90 days are eligible and ₹10 lakh is outstanding for more than 90 days. The stipulated margin is 25% on eligible stock and 40% on eligible debtors. For Borrower D, the branch calculated drawing power using a stock statement that was four months old.

Borrower A's CC balance remains below its sanctioned limit and drawing power. During the previous 90 days, credits total ₹2.5 lakh while interest debited is ₹3 lakh. There are no other irregularities relevant to the account. How should the account be treated?

1. Classify it as regular because the balance remains below both the sanctioned limit and drawing power.
2. Classify it as regular because any credit during the previous ninety days prevents out-of-order status.
3. Treat it as out of order because credits in the 90-day period do not cover interest debited. (correct answer)
4. Treat it as out of order only if balance exceeds sanctioned limit continuously for at least ninety days.

Answer: C — Treat it as out of order because credits in the 90-day period do not cover interest debited.

Working. 1. Compare the balance with the sanctioned limit and drawing power: it is below both. 2. Compare total credits during the previous 90 days with interest debited for that period. 3. Credits of ₹2.5 lakh are less than interest of ₹3 lakh. 4. The third out-of-order condition is met; the CC account is out of order and is classified as NPA under the applicable RBI directions.

Explanation. The out-of-order test is not limited to an excess balance. Where the balance is below the sanctioned limit or drawing power, the account is still out of order if credits are insufficient to cover interest debited during the previous 90 days. Here, credits of ₹2.5 lakh are below interest debited of ₹3 lakh. Option (b) is incorrect because the mere presence of credits does not regularise the account; their sufficiency must be assessed.

Where it goes wrong. Assuming that any credit entry during the 90-day period prevents an out-of-order classification.

Authority. RBI, Commercial Banks - Income Recognition, Asset Classification and Provisioning Directions, 2025, para 5(7)(iii), updated as on 1 October 2026; RBI, Commercial Banks - Income Recognition, Asset Classification and Provisioning Directions, 2025, para 42(2); ICAI Study Material, Chapter 10, section on NPA and out-of-order CC/OD accounts, p. 10.27

Question 12 · 2 marks · Chapter 10: Audit of Banks · hard

For Borrower C, what is the drawing power based on the stock audit information and stipulated margins, after excluding damaged or obsolete stock, unpaid stock and debtors outstanding for more than 90 days?

1. ₹81.75 lakh, excluding unpaid stock but retaining damaged stock and applying the debtor margin to eligible debtors.
2. ₹78 lakh, applying both margins to eligible stock and eligible debtors after the specified exclusions. (correct answer)
3. ₹89.25 lakh, excluding damaged stock but retaining unpaid stock and applying the debtor margin to eligible debtors.
4. ₹99 lakh, applying both margins to gross stock and gross debtors without removing ineligible balances.

Answer: B — ₹78 lakh, applying both margins to eligible stock and eligible debtors after the specified exclusions.

Working. 1. Eligible stock = ₹100 lakh - ₹5 lakh damaged/obsolete - ₹15 lakh unpaid = ₹80 lakh. 2. Stock DP = ₹80 lakh × 75% = ₹60 lakh. 3. Eligible debtors = ₹40 lakh - ₹10 lakh over 90 days = ₹30 lakh. 4. Debtor DP = ₹30 lakh × 60% = ₹18 lakh. 5. Total DP = ₹60 lakh + ₹18 lakh = ₹78 lakh.

Explanation. Eligible stock is ₹100 lakh less ₹5 lakh damaged stock and ₹15 lakh unpaid stock, leaving ₹80 lakh; after a 25% margin, drawing power is ₹60 lakh. Eligible debtors are ₹40 lakh less ₹10 lakh overdue beyond 90 days, leaving ₹30 lakh; after a 40% margin, drawing power is ₹18 lakh. Total drawing power is ₹78 lakh. Option (c) wrongly retains ineligible stock and debtors.

Where it goes wrong. Applying margin to gross current assets without first removing damaged, unpaid or otherwise ineligible balances.

Authority. ICAI Study Material, Chapter 10, section 13: Computation of Drawing Power, pp. 10.34-10.35; RBI, Commercial Banks - Income Recognition, Asset Classification and Provisioning Directions, 2025, para 15(1)-(4), updated as on 1 October 2026

Question 13 · 2 marks · Chapter 10: Audit of Banks · hard

Borrower B's balance has continuously exceeded the lower of its sanctioned limit and drawing power for 92 days. It remains within the sanctioned limit, and credits are sufficient to cover interest. What is the correct asset-classification conclusion?

1. Keep it standard because the balance has not exceeded the sanctioned limit at any time.
2. Keep it standard because credits have covered all interest debited throughout the stated period.
3. Classify it out of order only if both limits are exceeded continuously for at least ninety days.
4. Treat it as out of order because the balance exceeded drawing power continuously for ninety days. (correct answer)

Answer: D — Treat it as out of order because the balance exceeded drawing power continuously for ninety days.

Working. 1. Identify the applicable threshold: the lower of sanctioned limit and drawing power. 2. Compare outstanding balance with that threshold. 3. Confirm that excess has continued for 92 days, which exceeds the 90-day requirement. 4. The first out-of-order condition is satisfied even though the account is within the sanctioned limit and interest credits are adequate.

Explanation. For a CC/OD account, the excess-balance test is measured against the sanctioned limit or drawing power, and continuous excess for 90 days is sufficient. The relevant threshold is the lower applicable drawing power here, not only the sanctioned limit. Borrower B has exceeded drawing power for 92 days, so the account is out of order and is classified as NPA. Option (b) overlooks that servicing interest does not cure continuous excess over drawing power.

Where it goes wrong. Comparing the outstanding balance only with the sanctioned limit and ignoring a lower drawing-power limit.

Authority. RBI, Commercial Banks - Income Recognition, Asset Classification and Provisioning Directions, 2025, para 5(7)(i), updated as on 1 October 2026; RBI, Commercial Banks - Income Recognition, Asset Classification and Provisioning Directions, 2025, para 42(2); ICAI Study Material, Chapter 10, section on NPA and out-of-order CC/OD accounts, p. 10.27

Question 14 · 2 marks · Chapter 10: Audit of Banks · medium

Borrower D's drawing power was calculated from a stock statement dated four months before the relevant reporting date. What should the auditor conclude under the RBI working-capital instructions?

1. Treat the statement as too old; outstanding based on that drawing-power calculation is deemed irregular. (correct answer)
2. Retain the drawing power because the sanctioned limit remained unchanged during the four-month period.
3. Classify the account automatically as an NPA because any statement older than three months triggers NPA status.
4. Accept the statement if management represents that stock quantities remained unchanged during that period.

Answer: A — Treat the statement as too old; outstanding based on that drawing-power calculation is deemed irregular.

Working. 1. Determine the date of the stock statement used for DP. 2. Compare its age with the three-month limit. 3. Since it is four months old, the statement is stale and the related DP calculation is irregular. 4. Obtain a current stock statement and recalculate DP. 5. Separately evaluate the account against the RBI out-of-order and NPA conditions.

Explanation. Drawing power must be based on a current stock statement, and statements relied upon by the bank should not be older than three months. An outstanding balance based on drawing power calculated from a statement older than three months is deemed irregular. Option (c) overstates the consequence: the age of the statement makes the drawing-power basis irregular, but it does not by itself establish every condition required for NPA classification.

Where it goes wrong. Equating an irregular drawing-power basis with automatic NPA classification.

Authority. RBI, Commercial Banks - Income Recognition, Asset Classification and Provisioning Directions, 2025, para 15(2)-(4), updated as on 1 October 2026; ICAI Study Material, Chapter 10, section 13: Computation of Drawing Power, p. 10.34

Question 15 · 2 marks · Chapter 8: Audit Report · hard

Scenario. Beacon Ltd. has financial liabilities existing at 31 March 2026, with several material maturities falling within the following twelve months. Its current ratio has weakened, trade receivables include old disputed balances, and debt maturities are concentrated in the next nine months. Management's cash-flow forecast assumes a refinancing facility still under negotiation and a property sale for which no binding buyer exists. The auditor's report is dated 28 May 2026, and CARO 2020 applies.

Beacon's refinancing and property-sale assumptions are not supported by binding arrangements, while receivables are aged and debt maturities are concentrated within nine months. What should the auditor evaluate before answering CARO 2020 clause (xix)?

1. Use the current ratio alone and answer affirmatively if it improves before reporting, ignoring asset ageing, cash forecasts, maturities and funding assumptions.
2. Rely on management representation because the one-year assessment begins on the audit report date rather than the balance-sheet date.
3. Assess ratios, asset ageing, realisation and payment dates, other information and plans against liabilities existing at year-end and due within one year. (correct answer)
4. Review only liabilities already overdue at report date, excluding future maturities and disputed financial assets from the one-year assessment.

Answer: C — Assess ratios, asset ageing, realisation and payment dates, other information and plans against liabilities existing at year-end and due within one year.

Working. 1. List liabilities existing at 31 March and map contractual due dates through 31 March 2027. 2. Test asset ageing and realistic collection dates. 3. Analyse liquidity and other relevant ratios. 4. Challenge refinancing and disposal assumptions using external evidence and Board-approved plans. 5. Conclude whether material uncertainty exists as at 28 May 2026 and report under CARO paragraph 3(xix), giving reasons where the answer is unfavourable or qualified.

Explanation. Clause 3(xix) requires a reasoned assessment using financial ratios, ageing and expected realisation of financial assets, payment dates of liabilities, other information, the auditor's knowledge of the Board and management plans. The question concerns liabilities existing at the balance-sheet date and whether they can be met as they fall due within one year from that date, assessed as of the audit-report date. Option (b) uses the wrong starting point and over-relies on management representation.

Where it goes wrong. Measuring the one-year period from the audit report date, or treating an unsupported refinancing plan as sufficient evidence.

Authority. CARO 2020, paragraph 3(xix): Capability of meeting financial liabilities; CARO 2020, paragraph 4: Reasons for unfavourable or qualified answers and inability to express an opinion; SA 570, Going Concern; ICAI Study Material, Chapter 8, CARO 2020 reporting requirements, pp. 8.80-8.81; ICAI Study Material, Chapter 7, section on SA 570: Going Concern