## Expenditure Audit: Audit of Provisions and Contingencies

Provisions form a critical and often material component of a bank's expenses. The auditor must apply structured procedures.

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### (a) Obtain Understanding of Provisioning Process

Understand how the bank computes provisions for:

Standard Assets (performing accounts)
Non-Performing Assets (NPA) across sub-categories (Sub-standard, Doubtful, Loss)

Check the basis of classification of advances as Standard vs NPA.

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### (b) Detailed Breakup of Loans

Obtain a detailed breakup of all Standard and Non-Performing Loans.
Agree opening balances of the breakup with the General Ledger to ensure accuracy and completeness.

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### (c) Verify Loan Classification on Sample Basis

Select a sample of loans and independently verify whether the classification (Standard / Sub-standard / Doubtful / Loss) is correct.
Confirm that the applicable provisioning rate has been correctly applied.

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### (d) Ensure Regulatory Compliance

Ensure compliance with all RBI circulars and regulatory requirements related to provisioning.
Confirm that provisions meet the minimum required levels prescribed by RBI.

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### (e) Examine Other Provisions for Expenses

Review provisions made for expenses other than advances (e.g., pending litigation, employee benefits).
Check whether the circumstances justify making those provisions.
Assess the adequacy of provisioning by discussing with management and obtaining explanations.

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### (f) Review Tax Provisions and P&L Debits

Obtain the tax provision computation from management.
Review the nature of all items debited/credited to P&L:
Provision for taxation
Provision in respect of NPA
Provision for contingencies
Provision for diminution in value of investments

Worked example

### Example 1

Sample Verification of Loan Classification:

Auditor selects a loan account with outstanding balance Rs 50 lakhs. The account shows no payment for 95 days.

Under RBI norms, an account is NPA when overdue > 90 days.
This account should be classified as Sub-Standard NPA, not Standard.
Required provision rate on Sub-Standard = 15% of outstanding → Rs 7.5 lakhs.
If bank has provided only Rs 2 lakhs, there is a provisioning shortfall of Rs 5.5 lakhs to be reported.

### Example 2

Agreeing Breakup with General Ledger:

Bank provides a schedule: Standard Loans = Rs 800 Cr, Sub-Standard = Rs 50 Cr, Doubtful = Rs 30 Cr, Loss = Rs 5 Cr. Total = Rs 885 Cr.

Auditor agrees this to General Ledger balance of Total Advances = Rs 885 Cr. Any mismatch indicates either classification error or ledger error — must be investigated.

⚠️ Common exam mistakes

Relying solely on management's classification without independently verifying on a sample basis.
Not checking whether provisions meet the minimum RBI-prescribed rates — understated provisions misstate the financial statements.
Failing to assess adequacy of provisions for contingencies — these require judgement and management discussion.
Not verifying that provision for diminution in value of investments is correctly computed per periodic revaluation.

Reference: — RBI Master Circular — Income Recognition, Asset Classification and Provisioning Norms (IRAC Norms); SA 540 (Auditing Accounting Estimates)

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Expenditure Audit — Audit of Provisions and Contingencies

Worked example

⚠️ Common exam mistakes