a. Audit Steps to Ascertain the True Position of the Loan Portfolio:

1. Review of Loan Agreements: The auditor should examine the loan agreements, particularly for the N1 billion term loan, to confirm the agreed terms, repayment schedules, interest rates, and any other relevant clauses that may impact the loan’s classification as current, overdue, or doubtful.
2. Confirming Loan Balances with Borrowers: The auditor should send confirmation requests to the borrowers to verify the loan balances, repayments made, and any adjustments to the loans, especially the N1 billion loan that has shown no repayments.
3. Assessing Loan Performance: The auditor should assess the repayment history of all loans, including the N1 billion loan, to identify any loans that are overdue or have not received the expected payments. This includes checking whether interest payments and principal repayments are being made in accordance with the agreements.
4. Reviewing Loan Recovery Plans: For loans that are overdue, the auditor should review any loan restructuring or recovery plans, and discuss with management the actions being taken to recover the overdue loans.
5. Testing Provisions for Doubtful Debts: The auditor should perform substantive tests to assess the adequacy of provisions for doubtful debts. This includes evaluating the bank’s historical experience with loan defaults, the age of the loans, and management’s judgment regarding the collectability of loans.

b. Basis for Provision and Determining the Provision for Doubtful Debts:

1. Review of Loan Aging: The auditor should review the aging of the loan portfolio to determine the proportion of loans that are past due and assess their collectability. Typically, loans that are overdue for more than 90 days may be classified as doubtful debts.
2. Historical Default Rates: The auditor should analyze historical data on loan defaults and write-offs, and use this data to determine an appropriate provision percentage for different categories of loans.
3. Evaluation of the Borrower’s Financial Position: For the N1 billion loan, which has shown no repayments, the auditor should assess the borrower’s financial position and their ability to make future repayments. If the borrower is facing financial difficulties, this loan may require a higher provision for doubtful debts.
4. Determining the Provision Amount: The provision for doubtful debts can be calculated by applying the determined provision percentages to different aging categories of loans (e.g., 5% for loans overdue 30-60 days, 20% for loans overdue 60-90 days, and 50% for loans overdue more than 90 days). For the N1 billion loan with no repayments, the auditor may consider applying a higher provision rate (e.g., 100%) due to the lack of repayment and the high risk of default.

Provision Calculation Example:

• Total loans and advances: N50 billion
• Provision for loans overdue: Assume 5% for loans overdue 30-60 days, 20% for 60-90 days, and 50% for loans overdue 90+ days.
• N1 billion loan (no repayments): 100% provision for this loan, as it is considered doubtful.

This would require further calculations based on the aging of the loans and their corresponding provision percentages.