Audit of Banks, NBFCs and Public Sector Undertakings
Why this chapter rewards structured knowledge more than reasoning alone
The method chapter flagged this cluster specifically: bank, NBFC and public sector audit content cannot be reasoned out from general auditing principles the way risk assessment or materiality judgement can, because the specific classification thresholds, provisioning rules, and audit concerns this chapter covers are defined by sector-specific regulation with no direct analogue in an ordinary commercial audit. Learn this chapter's rules as a structured body of sector-specific knowledge, and apply general auditing judgement on top of that knowledge once it is genuinely in place.
Special features of bank audits
Why banks are structurally different from an ordinary commercial entity. A bank's core business is holding and lending other people's money at scale, with advances (loans) constituting its largest and riskiest asset category, and deposits constituting its largest liability, both subject to specialised regulatory oversight (the Reserve Bank of India, in the Indian context) with its own detailed prudential norms that exist alongside, and in some respects take precedence in practical audit emphasis over, the ordinary Ind AS financial reporting framework.
Asset classification: standard, sub-standard, doubtful and loss. Every bank advance is classified based on the number of days it remains overdue (a non-performing asset, or NPA, generally being one where interest or principal remains overdue for a period exceeding 90 days). A standard asset carries no more than normal credit risk. A sub-standard asset is one that has remained an NPA for a period not exceeding 12 months from the date it was first classified as an NPA. A doubtful asset is one that has remained in the sub-standard category for a period exceeding 12 months — note the sequential, cascading definition: doubtful status is defined relative to sub-standard status, not directly from the original overdue date, meaning an asset must genuinely pass through the sub-standard category first before it can become doubtful. A loss asset is one identified as a loss by the bank, its internal or external auditors, or regulatory inspection, but not yet written off in full, where the asset is considered virtually uncollectible with little realisable value.
Graduated provisioning. Provisioning requirements rise progressively with this classification, reflecting the increasing likelihood, and eventually near-certainty, of loss as an asset moves through these categories — a modest general provision for standard assets, a higher, specified provisioning percentage for sub-standard assets, and progressively higher, tiered provisioning for doubtful assets (varying further based on how long the asset has remained doubtful and whether it is secured or unsecured), and 100% provisioning for a loss asset, reflecting that the asset's value is regarded as effectively already lost. This graduated structure is a direct application of the prudence concept: rather than waiting for a loss to be definitively confirmed before recognising any provision at all, the framework requires progressively increasing recognition of expected loss as the evidence of impairment accumulates and strengthens over time.
Income recognition on NPAs. Once an advance is classified as an NPA, income (interest) is not recognised on an accrual basis and is instead recognised only when actually received — a direct, deliberate departure from ordinary accrual accounting, justified because the very characteristic that makes an asset an NPA (default on payment obligations) is itself strong evidence that future interest income on that specific asset is not reasonably certain of collection, meaning accruing it further would recognise income the bank does not have reasonable assurance it will genuinely receive. Where interest was already accrued on an asset before it became an NPA, this previously accrued but uncollected interest income must itself be reversed once the asset is reclassified as an NPA — a specific, commonly tested computational point, since reversing this prior accrual is a distinct step from simply ceasing further accrual going forward.
Evergreening. A specific, deliberately concerning practice this chapter flags for professional scepticism: evergreening occurs where a bank extends a fresh loan to a borrower specifically to enable that borrower to repay an existing, already-troubled loan, disguising what is, in economic substance, a continuing, deteriorating credit exposure as though it were a fresh, healthy asset, artificially avoiding the NPA classification and provisioning consequences the original, troubled loan would otherwise require. Auditors are specifically expected to exercise professional scepticism toward loan restructuring or refinancing patterns that could represent evergreening in substance, rather than accepting a fresh loan's classification as "standard" purely at face value.
Bank-specific audit areas beyond advances. Beyond advances classification, bank audits address investments (classified and valued under RBI-specific categories distinct from, though conceptually related to, Ind AS 109's classification framework), contingent liabilities (letters of credit, guarantees, and derivative exposures, often carried at a scale materially larger relative to the bank's own balance sheet than a typical commercial entity's contingent liabilities would be, given banking's core function of providing exactly these kinds of credit-substitute instruments to customers), and branch audit consolidation, where a large bank's numerous individual branches are each subject to some level of audit (full-scope for the largest, most significant branches, more limited for smaller ones), with the central statutory auditor responsible for consolidating and forming an overall opinion, mirroring precisely the significance-driven scoping and consolidation logic the group audits chapter developed for a group's various components.
Special features of NBFC audits
Non-Banking Financial Companies undertake financial activities (lending, investment, leasing) similar in substance to banks, but without accepting demand deposits in the same manner and operating under a distinct, though structurally similar, regulatory framework (also RBI-supervised in India) with its own asset classification and provisioning norms broadly analogous to the bank framework above, adjusted for NBFC-specific regulatory categories and thresholds — the underlying discipline (classification by overdue period, graduated provisioning, non-accrual of income on non-performing assets) transfers directly from the bank framework, with the specific thresholds and categories to be learned as their own, NBFC-specific rule set rather than assumed identical to the bank framework in every particular.
Overview of audit of public sector undertakings
Propriety audit: a lens beyond financial fairness. Public sector undertaking (PSU) audits, conducted with the involvement of the Comptroller and Auditor General of India, incorporate a dimension beyond the ordinary financial statement fairness assurance this whole paper has otherwise focused on: propriety audit, examining not merely whether transactions are properly recorded and the financial statements fairly presented, but whether public expenditure has been incurred with due regard to economy, efficiency and effectiveness, and whether public funds have been applied for the purposes for which they were authorised — a fundamentally different question from ordinary financial statement fairness, since a transaction can be entirely correctly recorded and disclosed in the financial statements, and still fail a propriety test if the expenditure itself was extravagant, unnecessary, or inconsistent with the specific public purpose for which the funds were sanctioned.
Performance audit. Beyond financial and propriety audit, PSU audit extends to performance audit — assessing whether a specific public programme or scheme has actually achieved its intended objectives, and whether resources were used efficiently and effectively in pursuing them — a fundamentally different exercise from either financial audit (is the financial information fairly presented) or propriety audit (was the expenditure proper), asking instead whether the underlying programme actually worked, an evaluative question closer to policy and programme evaluation than to conventional financial assurance.
Comprehensive audit. Combining elements of financial, propriety and performance audit together, a comprehensive audit of a PSU takes an integrated view across all three dimensions, reflecting the broader public accountability purpose PSU audits serve, extending well beyond the narrower financial-statement-fairness focus that governs an ordinary commercial company's statutory audit.
Why this chapter's specific, sector-defined rules matter as much as any general principle in this paper
Nothing in the general auditing framework this qualification has built across Intermediate and the earlier Final chapters would, on its own, tell you the specific day-count thresholds separating standard from sub-standard from doubtful assets, or the specific concept of propriety extending a PSU audit beyond ordinary financial fairness — this is content that must be learned directly, as its own defined body of sector-specific knowledge, and applied with the same rigour and scepticism (toward evergreening, toward propriety concerns) this paper's general framework has developed throughout, now aimed specifically at the distinctive risks these two sectors present.
