https://linktr.

ee/ankushchirimar
 Bank & NBFC Audit

Bank Audit

Banks’ distinguishing characteristics Special audit considerations in banks due to

• Custody of large volumes of monetary items • Scale of operations & significant exposures
• Transactions requiring complex a/cing & ICS within short period of time
• Operation through wide network of • Effect of regulatory requirements
geographically dispersed branches • Continuing development of new products
• Transactions initiated at 1 location, recorded • Extensive dependence on IT of transactions
& managed at another location • Particular nature of risks in transactions
• Direct Initiation & completion of transactions
by customer without intervention by bank Legal Framework
• Regulatory requirements by Govt • Banking Regulation Act, 1949
• State Bank of India Act, 1955
• Reserve Bank of India Act, 1934
• Companies Act, 2013
• Info Technology Act, 2000
• Prevention of Money Laundering Act, 2002

Form & Content of FS Audit & Appointment of Auditor

• Form A of 3rd Schedule to Banking Regulation Nationalised or Public sector banks appoints 4 or
Act, 1949 for B/S & Form B for P/L more CA firms as Statutory Central Auditors
• Ind AS is deferred by RBI for all Scheduled (SCAs) & 1 CA firm as Statutory Branch Auditors
Commercial Banks (SCBs) presently (SBAs)

Appointment letter sent by banks to SCAs contains

• Procedural requirements to be complied in • Statement of division of work among joint
accepting assignment auditors in nationalised banks
• Period of appointment • Scope of assignment including special reports
• Particulars of other central auditors in addition to main report
• Particulars of previous auditors • For SBAs, appointment letter is same as
above except for other auditor & work division

Appointing Authority
• Banking co. - AGM Shareholders • For Both, approval of RBI is required
• Nationalised bank – BOD

Conducting Audit - Stages Special Considerations in IT Environment

1. Initial Considerations Bank shall share below info with auditors -
• Acceptance & Continuance • Overall IT policy, structure & environment
• Terms of Audit Engagements • Data processing & interface under systems
• Communication with Previous Auditor • Data integrity & security
• MIS reports generated & their periodicity
2. Understanding • Major exception report & generation process
• Understanding Bank & Its Environment • Process of generating info for FS disclosures
• Understand Bank's A/cing Process

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 Bank & NBFC Audit

• Understanding Risk Mgt Process - Effective Key security control aspects that auditor
Risk Mgt System Requires – addresses in computerised bank
o Oversight by TCWG • Verify changes are authenticated
o Identification & monitoring of risks • Verify charges calculated manually are
o Control activities properly accounted & authorised
o Monitoring activities • Ensure system prevents unauthorised
o Reliable Info Systems amendments to programmes
• Verify SODs ensured in granting access
3. Risk Assessment • Ensure authorised, accurate & complete data
• Identifying & Assessing ROMM is available for processing
• Assess Specific Risks • Verify if access controls match with
• Assess Risk of Fraud responsibilities

4. Execution
• Engagement Team Discussions
• Prepare response to Assessed Risks
• Establish Overall Audit Strategy

5. Reporting - Discussed Later

General ICs Loans & Advances ICs

• Work of 1 person shall be checked by another • Bank make advances only after satisfying as to
• Staff shall be shifted from 1 position to creditworthiness of borrowers
another frequently & without prior notice • Sufficient margin shall be kept against
• All bank forms kept in possession of officer securities to cover decline in value
& another officer shall verify them • All securities received & returned by
• Signature book kept with responsible officer responsible officer & in custody of 2 officers
& access allowed only to authorised officers • All securities are registered in name of bank
• Mail opened by responsible officer. Sign on • All a/cs kept within drawing power & sanction
letters checked by officer with sign book limit. Additional temporary limit, for max 20%
• Arithmetical accuracy of books shall be of existing limit & max 90 days
proved independently every day • Operation in each a/c shall be reviewed at
least once every year

Cash ICs Credit Card Operations ICs

• Cash in joint custody of 2 responsible officer • Effective screening of applications with good
• Cash shall be test-checked daily credit assessments
• Actual cash in hand shall agree with balance • Strict control over storage & issue of cards
in Day Book every day • System whereby merchant confirms
• High value cash receipts & payments shall be unutilised limit before accepting card
verified by higher officer • System of prompt reporting by merchants of
• Payments shall be made only after vouchers all settlements accepted by them
are approved by authorised officer • Reimbursement to merchants only after
• Cashier shall have no access to customer’s verification of acceptance of cards
a/cs & Day Book • All reimbursement immediately charged to
customer’s a/c

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 Bank & NBFC Audit

Internal Audit & Inspection – RAP includes Clearings ICs

• Identification of inherent business risks in • Auditor shall check whether sign of drawer
activities of branches of cheque is verified by staff
• Assessment of effectiveness of control for • Under Cheque Truncation System, electronic
monitoring inherent risks (Control risk) image of cheque is transmitted to paying
• Assessment of level of risk areas & overall branch through clearing house
business risk & control risk • Branch shall call/email customer for cheque
• Drawing up risk matrix considering factors of Rs. 5 lakhs & above for inward clearings
• Unpaid cheques shall be sent to customers

Compliance with CRR & SLR requirements - Special-purpose Certificates of Investments –

Procedures Procedures
• Obtain understanding of circulars of RBI, • Banks shall get their investments under PMS
regarding composition of DTL separately audited by external auditors
• Request branch auditors to send weekly trial • Examine if bank is maintaining separate a/cs
balance as on Friday to be consolidated at HO for investment in own Investment A/c, in PMS
• Examine, on test basis, DTL consolidations clients’ a/c & on behalf of other constituents
• Banks shall do half-yearly reviews as of 30th
• Items excluded from liabilities in DTL are – Sep & 31st March of investment portfolio
o Recoveries from borrowers for bad debts • IA shall do concurrent audit of treasury
o Un-adjusted deposits lying in link branches transactions & its report shall be submitted
for agency business to extent not adjusted to CMD once every month
o Margins held & kept in sundry deposits
o Amounts received in INR for import bills Auditor obtains evidence about following while
& held in sundry deposit pending final rates auditing advances
o Paid up capital, reserve, credit balance in • Advances are outstanding on date of B/S
P/L, loan from RBI & refinance from EXIM • Advances represent amounts due to bank
bank, NHB, SIDBI & NABARD • Amounts due to bank are appropriately
supported by loan docs
• Items included in liabilities in DTL are – • There are no unrecorded advances
o Net credit bal in branch adjustment a/cs • Stated basis of valuation of advances is
o Borrowings from abroad by Indian banks appropriate & recoverability is recognized
needs to be considered at gross level • Advances are disclosed as per a/cing policies
o Reconciliation of Nostro a/cs with Mirror
A/cs needs to be scrutinized carefully

Evaluation of ICs over Advances - Procedures Substantive Audit Procedures for Advances
• Examine area of credit appraisal & verify if • Examine all large advances & others on sample
procedure for credit worthiness are followed • Verify correctness of master data in CBS
• Examine all necessary loan docs are executed • Verify completeness & accuracy of interest
after sanction but before disbursals • Carry out appropriate AP
• Examine existence & valuation of securities • Examine a/cs adversely commented by
• Review operations of a/cs & adverse features concurrent auditors/RBI
• Examine if system for review of advances is • Examine quick/early mortality a/cs (which
being followed became NPA within 12 months of its sanction)
• Review whether drawing power is calculated
on basis of stock statements

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 Bank & NBFC Audit

Recoverability of Advances – Procedures A/cs regularized near B/S date

• Review periodic statements submitted by • If regularised before B/S date through
borrowers genuine source, a/c not be treated as NPA
• Review latest FS of borrowers • If subsequent to repayment, branch provided
• Review reports on inspection of security further funds to borrower, carefully assess
• Review auditor’s reports for borrowers having if repayment was out of genuine source/not
credit facilities beyond cut-off limit • Where a/c indicates inherent weakness, it
shall be deemed as NPA

Drawing Power Calculation A/cs with temporary deficiencies

• Ensure that drawing power is calculated as per • Not classify as NPA merely due to temporary
extant guidelines of BOD deficiencies like non-availability of DP based
• Special consideration to reporting of sundry on latest stock statement, balance
creditors & stocks under LCs/guarantees outstanding exceeding limit temporarily & non-
• DP is calculated carefully for working capital renewal of limits on due date
advances for construction business • Stock statements for determining drawing
• Stock audit shall be done for all a/cs having power shall not be older than 3 months
exposure of more than stipulated limit otherwise irregular

Govt Guaranteed Advances Sale/Purchase of NPAs – Examine

• If Govt guaranteed advance becomes NPA, • Asset sold shall be NPA for at least 2 years
then for income recognition, interest shall not • Policy of BOD for procedures & valuation
be accounted unless realized & for asset • Assets are sold/purchased “without recourse”
classification, in case of CG Guarantee, only i.e entire credit risk is transferred
treated as NPA only when CG repudiates its • NPA are sold at cash basis only
guarantee, when invoked & in case of SG • Subsequent to sale of NPA, bank does not
Guarantee, treated as NPA if overdue for > have any risk for sold NPAs
90 days • Not purchase NPA which it had originally sold
• If bank has not invoked CG Guarantee though
overdue for long, reason reported in LFAR For sale of NPA, ensure -
• On sale, NPA is removed from books of bank
Agricultural Advances • If sale is at price below net book value (NBV),
NPA as per crop season decided by State Level shortfall is debited to P/L
Bankers’ Committee depending on duration of crop • If sale is for value higher than NBV, excess
– short term (if overdue for > 2 crop seasons)/ provision is not reversed but utilised to meet
long term (if overdue for > 1 crop season) shortfall on sale of other NPAs

Basel III accord aims at For purchase of NPAs, verify –

• Improving bank's ability to absorb shocks • For capital adequacy, banks assign 100% risk
from stress weights to NPAs purchased
• Improving risk mgt & governance • NPA purchased is subjected to provisioning
• Strengthening transparency & disclosure requirements as per classification
• Recovery from NPA purchased is 1st adjusted
against acquisition cost & extra as profit

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 Bank & NBFC Audit

• Tier I capital consists share capital & Capital Risk Adequacy Ratio (CRAR)
disclosed reserves & it’s highest quality Eligible Total Capital x 100
capital as it is fully available to cover losses Risk weighted assets & off B/S items
• Tier II capital consists certain reserves &
subordinated debt. Its Loss absorption Minimum CRAR required - 9%
capacity is lower than Tier I

Current & saving a/cs – Procedures Disclosure Requirement for Contingent Liabilities
• Verify on sample basis CASA opened during • Other items where bank is contingently liable
year for KYC • Claims against bank not acknowledged as debt
• Verify bal in individual a/cs on sample basis • Liability for partly paid investments
• Check interest on test check basis • Acceptances, endorsement & other obligation
• Examine if balance confirmation is obtained • Guarantees given on behalf of constituents
periodically, examine on sampling basis • Liability for outstanding forward exchange
• Ensure debit bal in current a/c are not netted derivative contracts
out with liabilities but shown as advances
• Inoperative/dormant a/cs when there are no
transactions for over period of 2 years.
Verify on sample basis

For Contingent Liability, Auditor shall obtain Mgt Contingent Liabilities – Procedures
representation that • Ensure system that non-fund-based facilities
• ‘All off B/S transaction’ is accounted in BOA are extended only to regular constituents
• Above are entered with due procedure • Verify if bank has extended non-fund facility
• Above are supported by underlying docs to other than its regular customers
• All year end contingent liability are disclosed • Verify for LCs for import of goods, payment
• Disclosed contingent liabilities do not include to suppliers is based on shipping docs
crystallised liabilities like loss/expense • Review if comfort letters issued are
• Estimated financial effect of contingent considered as contingent liabilities
liability is based on best estimate (AS 29) • Ascertain if a/cing system provides
maintenance of adequate records
• Test completeness of recorded obligations

Auditor’s Report Reports & certificates

For nationalised bank, Report to CG includes - • Report on adequacy & operating effectiveness
• Whether, in auditor’s opinion, B/S exhibit of IFC over FR
true & fair view of affairs of bank • Long form audit report
• Whether P/L shows true balance of P/L • Report on compliance with SLR requirements
• If transactions of bank were within powers • Report on compliance for implementation of
• If return received from branch are adequate recommendations of Ghosh Committee for
• In case auditor called for explanation, frauds & of Jilani Committee on IC
whether it is given & if it is satisfactory • Report on instances of adverse credit-
• Other matter to be brought to notice of CG deposit ratio in rural areas
• Authentication of capital adequacy ratio
For unaudited branches, number of branches, • Asset liability Mgt
quantification of advances, deposits, interest • Certificate on Corporate Governance for
income & expense is disclosed in audit report listed banks

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 Bank & NBFC Audit

Long Form Audit Report (LFAR)

• It is to be given by SCAs & SBAs • LFAR is submitted to ACB indicating action
• SBAs LFAR is in form of questionnaire where taken for irregularity & copy of LFAR &
comments are provided & submitted to SCAs agenda, with Board views, is submitted to RBI
• LFAR is submitted by SCAs to Mgt after within 60 days of LFAR submission by SCAs
consolidation at HO level

Scope of Concurrent Audit

• Cash • Advances
• Investments • Foreign Exchange
• Deposits • House Keeping

Foreign Exchange – Procedures Advances – Procedures

• Check FCNR if debit & credits are permissible • Ensure advances are sanctioned properly as
• Ensure balances in Nostro a/cs in diff per delegated authority
foreign currencies are within limit • Ensure securities are received
• Ensure verification/reconciliation of Nostro & • Ensure post disbursement supervision &
Vostro a/c transactions/balances follow-up is proper
• Check if inward/outward remittance are • Verify if misutilisation & diversion of funds
properly accounted • Check if letters of credit issued are within
• Check foreign bills negotiated under LCs delegated power & for genuine transactions
• Examine extension & cancellation of forward • Check bank guarantees are properly worded
contracts for foreign currency • Ensure follow-up of overdue bills of exchange

Appointment of Concurrent Auditors Reporting Systems of Concurrent Auditors

• Option of bank’s own staff or external • Proper reporting of findings. Quarterly
auditors is at discretion of banks review submitted to ACB
• If own officials, they shall be experienced, • Zone-wise reporting of findings & annual
well trained & senior & independent of branch report of audit shall be submitted to ACB
where audit is to be conducted • Before submission discuss important issues
• ACB of bank shall decide maximum tenure of • Minor irregularities rectified in timely
external auditors which shall not be >5 years manner. Serious irregularities shall be
continuously & for branch/units not > 3 years reported to HOs for immediate action
• If external firms are appointed & serious • Fraud immediately reported to Inspection &
omissions or commissions are noticed in their Audit Dept (HO) & Chief Vigilance Officer &
working their appointments may be cancelled Branch Managers (unless he is involved)
& reported to RBI & ICAI • Follow-up on report be given high priority

MCQ Points
• RBI requires SCAs to verify compliance with • Non-Banking Assets Acquired in Satisfaction
SLR requirements of 12 odd dates in diff of Claims - recorded at lower of net book
months of fiscal year not being Fridays value of advance or NRV of asset acquired
• Pay special attention to credit & debit • All commercial banks (excluding RRBs & LABs)
entries in reconciliation statement provided shall follow ‘Stress Testing framework’
by RBI remaining unresponded for > 15 days • Non-Resident (External) Rupee a/c opened
by NRIs & persons of Indian origin & Non-

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 Bank & NBFC Audit

• Balances with banks outside India converted Resident Ordinary Rupee a/c opened by all
into INR at exchange rates as on B/S date NRs. NRE a/c is repatriable & NRO a/cs are
• Investments are classified as NPA when not repatriable except for all current income
interest/principal is overdue for > 90 days • For bulk deposits (>= Rs. 2 crores for SCBs),
• A/cs where limits are not reviewed within verify correct rate of interest is offered
180 days from due date/date of sanction, • Deposits designated in foreign currencies -
shall be treated as NPA Interest is paid on basis of 360 days in year
• Asset classification to be borrower wise & • Inter-office transactions are not borrowings
not facility wise - All facilities granted to • Circular for recommendations of Committee
borrower will be treated as NPA on Legal Aspects of Bank Frauds is applicable
• Fixed assets is classified into Premises & to all SCBs (excluding RRBs)
Other Fixed Assets • Remuneration of Concurrent Auditor For
• Banking co. is prohibited from holding any external firms is fixed by ACB
acquired immovable property for period • Bulk Paper of Security Paper is to be written
exceeding 7 years from date of acquisition, off over time
except for its own use

NBFC

Definition of NBFC Co. exempted from registration under RBI

• A financial institution which is co. • Housing Finance (regulated by NHB)
• A non-banking institution which is co. & having • Merchant Banking Co. (SEBI)
principal business receiving of deposits • Stock Exchanges (SEBI)
• Other non-banking institution as RBI may, • Co. engaged in stock-broking (SEBI)
with previous approval of CG, specify • Venture Capital Fund Co. (SEBI)
• Co. will be treated as NBFC when its financial • Nidhi Co. (MCA, GOI)
assets constitute > 50% of total assets • Insurance Co. (IRDA)
(netted off by intangible assets) & income • Chit Co. (Chit Funds Act)
from financial assets constitute > 50% of • Specified Micro Finance Co.
gross income as per last audited FS & will be • Mutual Benefit Co
required to be registered as NBFC by RBI • Securitisation & Reconstruction Co.
• CIC which is not Systemically Important
U/s 45–IA of RBI Act, no NBFC is allowed to • Alternative Investment Fund
commence business without - • CIC with asset size of < Rs 100 crores & those
• RBI certificate of registration (CoR) with asset size of Rs 100 crores & above but
• Having net owned fund of Rs. 10 Crores (2 not accessing public funds
crores for P2P, AA, & NBFCs with no public
funds & no customer interface)

NBFCs are categorized as Scale Based Regulation – 4 Layers

• Deposit & Non-Deposit accepting NBFCs • Base Layer (BL) - Comprise of
• Non deposit taking NBFCs into systemically o NBFC-ND below asset of Rs 1000 crores
important & non-systemically important o Below NBFCs (always in BL) –
(NBFC-ND-SI & NBFC-ND) & ▪ Peer to Peer Lending (NBFC-P2P)
• By kind of activities, they conduct as – ▪ A/c Aggregator (NBFC-AA)
o Investment & Credit Co. (ICC) ▪ NOFHC
o Infrastructure Finance Co. (IFC)

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 Bank & NBFC Audit

o Systemically Important CIC (CIC-ND-SI) ▪ NBFCs not availing public funds & not
o Infrastructure Debt Fund (IDF-NBFC) having any customer interface
o Micro Finance Institution (NBFC- MFI)
o Factors (NBFC Factors) • Middle Layer (ML) - Consist of
o Non-operative financial holding (NOFHC) o All NBFC-Ds, irrespective of asset size,
o NBFC-ND with asset >= Rs 1000 crores
Diff B/w Banks & NBFCs o Standalone Primary Dealers (SPDs)
• NBFC cannot accept demand deposits, some o Infrastructure Debt Fund (IDF-NBFCs)
NBFCs can accept Term Deposits o CIC
• NBFCs are not part of payment & settlement o Housing Finance Co. (HFCs)
system & cannot issue cheques o Infrastructure Finance Co. (NBFC-IFCs)
• Deposit insurance facility of DICGC is not
available to depositors of NBFCs, unlike banks • Upper Layer (UL) - NBFCs identified by RBI
• No Minimum Exposure to Priority Sector warranting enhanced regulatory requirement.
required by NBFCs Top 10 eligible NBFCs in terms of their asset
size shall always reside in upper layer
Capital Requirements
• Every NBFC-D & NBFC-ND-SI shall maintain • Top Layer (TL) - It will ideally remain empty
minimum capital ratio of 15% unless there is substantial increase in
• Tier I capital (other than for MFI & IDF) at potential systemic risk from specific NBFC
any point of time, shall not be < 10%
• NBFCs lending for gold jewellery (such loans • Note
comprising 50% or more of financial assets) o NBFC-D, CIC, IFC & HFC will be included in
shall maintain minimum Tier l capital of 12% ML or UL (& not in BL). SPD & IDF-NBFC
will always remain in ML
Risk Weights for Assets o ICC, MFI, Factors & Mortgage Guarantee
• Cash & bank, FDs, certificates of deposits Co. can be in any layers
with banks, Approved Securities, Loans fully o Govt NBFCs shall be in BL/ML not in UL
secured against deposits held, Loans to staff,
Income tax deducted at source, Advance tax • All references to NBFC-ND means BL & NBFC-
paid, Interest due on Govt securities, Fund D & NBFC-NDSI means ML or UL
based claims on CG, Direct loan & investment • Existing NBFC-ND-SIs having asset b/w Rs.
in SG securities & CG guaranteed claims – 0% 500 Crores & below Rs. 1000 Crores (except
• Bonds of public sector banks & SG guaranteed those mandatorily in ML) is known as NBFC-BL
claims, not in default/are in default for <= 90
days – 20% Income Recognition
• All assets covering PPP & post commercial • Income on NPA shall be recognised only when
operations date infrastructure projects over it is actually realised
year of commercial operation – 50% • Income recognised before asset became NPA
• Rest All – 100% & remaining unrealised shall be reversed

Asset classification - Every NBFC (except MFIs)

• Standard asset is asset for which, no default in repayment of principal or interest is perceived
NBFC-ND NBFC-D & ND-SI
NPA – Overdue for >= 6 months >= 3 months
NPA for Lease/Hire Purchase – Overdue for >= 12 months >= 3 months
Sub-Standard Asset – Classified as NPA for <= 18 months <= 12 months
Doubtful Asset – Remained Sub-Standard for > 18 months > 12 months

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 Bank & NBFC Audit

• Sub-Standard Asset includes asset where Loss Asset means -

terms are renegotiated until expiry of 1 year • Asset identified as loss asset by NBFC or its
of satisfactory performance auditor or RBI, to extent not written off
• NPA classification is borrower wise & not • Asset adversely affected by threat of non-
facility wise (same as Banks) except for lease recoverability due to erosion in value of
& hire purchase security or non-availability of security or any
fraudulent act of borrower

Provisioning Requirements (except MFI)

• Loss Assets - 100% • Sub-standard assets – 10%
• Doubtful Assets – • Standard asset – NBFC-D & ND-SI - 0.40%,
o 100% for advance not covered by NBFC-ND - 0.25%
realisable value of security • Provision for standard assets is not netted
o Provision on secured portion as below – from gross advances but shown separately
Doubtful Period is up to 1 year – 20%, 1 to as ‘Contingent Provisions against Standard
3 years – 30% & > 3 years – 50% Assets’ in B/S

NBFC Acceptance of Public Deposit (RB) NBFC Prudential Norms

Directions, 2016 - Whether co. has complied • Auditor shall ensure BOD of NBFC granting
below aspects for mobilisation of public deposits- demand/call loans shall implement policy
• Ceiling on quantum of deposits is linked to • Check compliance of prudential IRACP norms
credit rating by approved rating agency • Auditor shall assess if NBFC has complied
• If downgrading of credit rating is below with prudential norms of classification
minimum specified investment grade, NBFC • For NPAs, auditor shall check if unrealised
shall regularise excess deposit as – income is not taken to P/L on accrual basis
o With immediate effect, stop accepting • Check if all NPAs in previous year also
fresh deposits & renewing existing ones continue to be shown as such in current year
o All existing deposit shall run to maturity
o Report position within 15 working days, to Classification of Frauds by NBFC
concerned Regional Office of RBI where a. Misappropriation & criminal breach of trust
NBFC is registered b. Fraudulent encashment through forged
o No matured deposit be renewed without instruments, manipulation of BOA
express & voluntary consent of depositor c. Unauthorised credit facilities for reward
• Ascertain if NBFC has accepted deposit only d. Negligence & cash shortages
after written application from depositor e. Cheating & forgery
• For NBFCs not accepting public deposits, f. Irregularities in foreign exchange transaction
check if BR is passed g. Any other type of fraud
• Verify deposit register maintained by NBFC d. & f. are fraud if intention to cheat is proved
• Test check interest calculations for deposits /suspected. If not, then fraud in below cases –
• Check if NBFC has filed its returns timely • Cash shortages > Rs 10,000
• Cash shortages >5000 if detected by Mgt/
auditor/officer & not reported by Cashier

Audit Check-list for ICC Audit Report for NBFC accepting public deposits
• Physically verify all shares held by NBFC • Whether NBFC is accepting deposit without
• Share held by depository obtain confirmation minimum investment grade credit rating

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 Bank & NBFC Audit

• Verify if NBFC has not advanced any loans • Whether capital adequacy ratio in return
against security of its own shares submitted to RBI is correctly determined
• Verify dividend if declared, is received by • Whether deposits in excess of deposits
NBFC & interest if due [except NPAs] is permissible are regularised in manner
accounted. Dividend on shares of Co. & units • Whether co. has violated any restriction on
of mutual funds are recognised on cash basis. acceptance of public deposit
NBFC has option to a/c dividend on accrual • Whether co. has defaulted in paying interest/
basis, if it is declared by Co. in AGM & its principal
right to receive payment is established. • Whether co. has complied with prudential
Income from bonds of Co. is taken on accrual norms on IRACP
basis only if interest rate is predetermined • Whether co. has furnished to RBI return on
& is serviced regularly not in arrears deposits in NBS 1
• Auditor ascertains if requirements of AS 13 • Whether co. has furnished to RBI quarterly
“A/cing for Investments” are complied return on prudential norms
• Verify Board Minutes for purchase & sale of
investments
• Check if investments are valued as per NBFC
Prudential Norms

Audit Report for All NBFC Audit Report for NBFC not accepting deposits
• If co. is NBFC & meeting Principal Business • If BOD has passed BR for non-acceptance
Criteria, auditor shall examine if co. has • If co. has accepted deposits during year
obtained CoR from RBI • If co. has complied with prudential norms for
• For co. holding CoR, whether it is entitled to IRACP
continue to hold CoR as per its Principal • For NBFC-ND-SI –
Business Criteria as on March 31 of year o Whether capital adequacy ratio as in
• Whether NBFC is meeting NOF requirement NBS-7 is correct
• Note - Every NBFC shall submit Certificate o Whether co. has furnished to RBI annual
from its Statutory Auditor that it is eligible statement of capital funds, risk assets &
to hold CoR to Regional Office of Dept of risk asset ratio (NBS-7)
Non-Banking Supervision under whose • Whether NBFC is correctly classified as
jurisdiction NBFC is registered, within 1 Micro Finance Institutions
month from date of finalization of B/S or
30th December, whichever is earlier

• For co. not required to hold CoR subject to conditions - include statement that co. is complying
with conditions of RBI
• Reasons to be stated for unfavourable or qualified statements - If auditor is unable to express
opinion on items above, his report shall indicate such fact with reasons

Auditor to submit exception report to RBI Applicability of Ind AS

• If statement for above item, is unfavourable • Periods starting 1 April 2018 - NBFCs having
or qualified, or co. has not complied with – net worth of Rs 500 crores or more &
o Chapter III B of RBI Act or holding, subsidiary, joint venture or associate
o NBFC Acceptance of Public Deposits (RB) co. of such NBFCs
Directions, 2016 or • Periods starting 1 April 2019 - NBFCs having
net worth of Rs 250 crore or more & holding,

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 Bank & NBFC Audit

o NBFC-ND (RB) Directions, 2016 & NBFC-D subsidiary, joint venture or associate co. of
& ND-SI (RB) Directions, 2016 such NBFCs
o Auditor shall report to Regional Office of • Net worth as per standalone FS as on 31st
Non-Banking Supervision of RBI under March 2016 or 1st audited FS for period
whose jurisdiction NBFC is located which ends after that date
• Duty of Auditor under above para is to report
only contraventions & not compliance

Diff b/w Division II (Other than NBFCs) & Division III (NBFCs) of Schedule III
• NBFCs are allowed to present B/S in order of liquidity which is not allowed to other Co.
• NBFC is required to separately disclose any item of ‘other income’ or ‘other expenditure’ which
exceeds 1% of total income. Division II requires disclosure exceeding 1% of revenue from
operations or Rs 10 lakhs, whichever is higher
• NBFCs are required to separately disclose under ‘receivables’, debts due from any LLP in which
its director is partner or member
• NBFCs are required to disclose items comprising ‘revenue from operations’ & ‘OCI’ on face of P/L
instead of showing as part of notes
• Separate disclosure of receivable having significant increase in credit risk & credit impaired
• Conditions for distribution of statutory reserves to be separately disclose in notes

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