# Audit of Income - Bank P/L
## Auditor's Concern
In the audit of income, the auditor is concerned with obtaining reasonable assurance that:
- Recorded income arose from transactions during the relevant period
- The income pertained to the bank
- There is no unrecorded income
- Income is recorded at the appropriate amount
## Materiality Threshold per RBI
RBI has advised that any income exceeding:
- 1% of total income (if reckoned gross), OR
- 1% of net profit before tax (if reckoned net of costs)
... should be considered on accrual basis as per AS 9. Items not material per this threshold may be recognised when received.
## Accrual vs. Realisation
- Banks recognise income on accrual basis
- It is a condition for accrual that ultimate collection should not be unreasonable to expect
- Banks should NOT recognise income on NPAs until actually realised
## Specific Income Items
### Advances against Securities
Interest on advances against Term Deposits, NSCs, IVPs, KVPs and Life policies may be taken to income on due date, provided adequate margin is available.
### Bills Purchased
Discount received on bills purchased outstanding at year-end should be apportioned between two years. Unexpired discount = "Other Liabilities". Discount paid on rediscount from other FIs is NOT to be netted off from discount earned.
### Bills for Collection
Customer's account is credited only after bill is actually collected. Branch commission becomes due only when bill is collected.
### Renegotiations
Fees and commissions earned from renegotiation/rescheduling of outstanding debts should be recognised on accrual basis over the period covered by the rescheduled extension.
## Reversal of Income (CRITICAL)
### On Account Becoming NPA
If any advance (including bills purchased/discounted) becomes NPA as at year-end, entire interest accrued and credited in past periods should be reversed or provided for if not realised. This applies to govt-guaranteed accounts also.
### Fees/Commissions on NPAs
Fees, commission and similar income that have accrued on NPAs should cease to accrue and be reversed/provided for past periods if uncollected.
### Wrong Recognition in Past
- If wrongly recognised in current year - reverse interest
- If wrongly recognised in previous years - make a provision for an equivalent amount
## Special Situations
### Leased Assets
Finance income on leased asset accrued before asset became NPA and unrealised - reverse/provide in current period.
### Take-out Finance
A loan procured later to replace initial loan (common in property development). If account is classified NPA by lending bank, income should not be recognised unless realised from borrower/taking-over institution.
### Partial Recoveries in NPAs
In absence of clear agreement on appropriation, banks must adopt a consistent accounting policy. Interest partly/fully realised in NPAs can be taken to income, but must ensure credits are not out of fresh/additional credit facilities sanctioned to the same borrower.
### Memorandum Account
On turning NPA, banks should reverse interest already charged but not collected by debiting P/L and stop further application of interest. Banks may continue to record accrued interest in a Memorandum Account for control purposes. For computing Gross Advances, memorandum-recorded interest is NOT taken into account.
## Auditor's Checks
- Enquire if there are any large debits in Interest Income account unexplained
- Enquire whether borrowers have communicated differences in interest charged