JB Nagar Study Circle 08092013 CA Bhavesh Vora 1 Coverage Introduction Auditors Report Reserve Bank Directions 2008 Important audit points Other important areas of compliances Standards of Auditing ID: 463652
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NBFC Auditors Report Directions, 2008
JB Nagar Study Circle
08-09-2013
CA Bhavesh Vora
1Slide2
Coverage
Introduction
Auditor’s Report (Reserve Bank) Directions, 2008Important audit pointsOther important areas of compliancesStandards of Auditing Penalties under RBI Act, 1934
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Introduction
The auditor’s report directions are issued by Reserve Bank as per powers conferred u/s 45MA of Reserve Bank of India Act, 1934 In the public interestIn the interest of the depositors
For the purpose of proper assessment of the books of accountsCA Bhavesh Vora JB Nagar CPE Study Circle3Auditor’s report (Reserve Bank) Directions, 1998 repealed
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Auditor’s Report Directions
ApplicabilitySeparate Report to Board of DirectorsDeposit/Non-Deposit taking NBFCsException report to RBI
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Auditor’s Report
Applicability
The directions applies to Auditors of all registered and Non-Registered (Deemed NBFCs) whether Deposit Accepting or Non-Accepting. Auditors to submit additional Report to the Board of DirectorsThe auditor to make a separate report to the Board of Directors of the NBFC (including deemed NBFCs) on the matters specified in the directions.
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Auditor’s Report…Cont
Matters to be included in the auditor’s report
The auditor’s report shall include a statement on the following matters, namely: In the case of all Non-Banking Financial CompaniesI. Whether the company is engaged in the business of NBFI and whether it has obtained a Certificate of Registration (CoR) from the Bank(Since the clause specifically mentions about obtaining Certificate of Registration, the clause is applicable to all those companies fulfilling criteria of 50% Financial Assets and 50% Income out of Financial Assets.)
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Auditor’s Report…Cont
II. Whether the company is entitled to continue to hold
CoR.Asset Income Pattern as on March 31 of the applicable yearAuditor to issue the certificate to the CompanyIII. Asset Finance Companies: Whether correctly classified. Principal Business Criteria – 60% instead of 50%IV. Whether NBFC-MFI (Micro Finance Institutions) has been correctly classified
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Auditor’s Report…Cont
Points to be reported in case of NBFCs holding/accepting Public Deposits
Quantum within Prescribed Limit?Excess deposits has been regularized? Acceptance of Public Deposit without Minimum Investment Grade Credit Rating?Credit Rating obtained is in Force? Aggregate Deposits are as per limits specified in the ratings?NOF level Rs. 200 Lacs? if no, whether deposits are frozen/brought down? 8
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Auditor’s Report…Cont
(vi) Default in repayment of principal or interest by the NBFC?
(vii) Prudential Norms CompliancesIncome recognition, Accounting standards, Asset classification, Provisioning for bad and doubtful debts, Concentration of credit/investments, etc9CA Bhavesh Vora JB Nagar CPE Study Circle
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Auditor’s Report…Cont
(viii) Capital Adequacy
Ratio – correctly determined in returns filed? Whether CRAR is as per minimum prescribed?(ix) Liquid Assets Requirements – Maintenance and communicating to regional office(x) Return in NBS-1 filed within stipulated period?(xi) Half yearly return on prudential norms(xii) Compliance in relation to opening of new branch/office to collect deposits/ closure/ appointment of agent10CA Bhavesh Vora JB Nagar CPE Study Circle
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Auditor’s Report…
Reporting in case of Non-banking financial company NOT accepting public deposits
Apart from the enumerated aspects applicable for all NBFCs - the auditor shall include a statement on the following matters, namely:-Resolution for non-acceptance of Public DepositsAccepted any deposits?Compliance with Prudential NormsIncome recognition Accounting standardsAsset
classification and provisioning for bad and doubtful debts
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Auditor’s Report…
In respect of Systemically Important Non-deposit taking NBFCs
(a) CRAR as disclosed in NBS- 7 return, has been correctly arrived at and whether such ratio is in compliance with the minimum CRAR prescribed by the Bank; (b) Furnished to the Bank the (NBS-7) within the stipulated period**Quarterly within 15 days of the end of the QuarterIn case of companies that has obtained advice from RBIAuditor’s statement on whether the company has obtained a specific advice from RBI? Whether those conditions are complied?
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Auditor’s Report…
Clause 4.
Reasons to be stated for unfavorable or qualified statementsReason for unfavorable or qualified statementUnable to express any opinion on any of the items, indicate such fact together with reasons thereof.
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Auditor’s Report…
Obligation of auditor to submit an exception report to RBIAny statement is unfavorable or qualified, or in the opinion of the auditor the company has not complied with:(a) The Chapter IIIB of RBI Act, 1934 (b) The NBFC Acceptance of Public Deposits (RBI) Directions, 1998; or(c) NBF (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007; or(d) NBF (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;
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Auditor’s Report…
Report to regional office - details of unfavorable or qualified statements and about the non-compliance in respect of the company.
Matters to be included in letter to RBIBoard report and the letter to RBI should be in syncDiscussion with the clientLetter received by auditors directly from RBIProposed Remedial Measures
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Important Audit Points
Investment AccountingNPA Accounting and provisioningCapital AdequacyIncome Recognition
Asset SizeAsset Income PatternKYC CompliancesPMLA Compliances16CA Bhavesh Vora JB Nagar CPE Study Circle
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Provisioning Norms
Standard Assets0.25% of standard assets (Notification dated 17
th January, 2011)Sub standard assets Non performing assets for a period of 18 months. Renegotiated loans upto one year of satisfactory performance of new terms. Provide 10% on the outstanding amount No specific provisions regarding Security Doubtful AssetsRemains sub standard asset for period of 18 months and aboveProvide 100% of uncovered outstanding amount17CA Bhavesh
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Provisioning Norms
To the extent of unsecured loan which is covered by value of realizable securities, the provisioning required based on the period the asset has remained doubtful
i. upto one year - 20%, ii. one to three year - 30%, iii. more than three years - 50% Loss Assets Identified by the Company, its Auditors or RBI (Period is not specified) orPotential threat of Non Recoverability due to erosion in the value of securities or non availability of security or any fraudulent act or omission on the part of the borrower100% Write off in the books (Same treatment for the Interest) 18CA Bhavesh Vora JB Nagar CPE Study Circle
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Other Important Norms
Investment policy to be framed for classification of investments into long term and short term
Board of Directors to Frame policy for granting call/demand loans and implement the sameFraming of Fair practice code as per guidelines given in circularInterest rate policyAsset classification into Standard, Sub standard, Doubtful and loss assets and provisioning requirements on these assets
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Other Important Prudential Norms..
Various disclosures should be made in the Balance sheet
Formation of audit committeeSchedule to be appended to the balance sheetSubmission of statutory auditor’s certificateCannot give loan against own sharesCommunicate within 30 days important changes as prescribed
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Standards on Auditing
All standards on auditing are applicable. However, following standards requires special attention
SA 240 – Auditor’s responsibility relating to Fraud in an audit of financial statements SA 250 – Consideration of Laws and Regulations in an Audit of Financial StatementsSA 265 – Communicating deficiencies in Internal Controls to those charged with GovernanceSA 610 – Using the work of Internal AuditorsSA 620 – Using the work of an Auditor’s Expert21CA Bhavesh Vora JB Nagar CPE Study Circle
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Penalty
Deposit Reporting
NBFC ought to file statements relating to Deposits accepted. If not filed, then auditor should make a report to RBI giving the aggregate amount of such deposits by the NBFI. (Section 45MA (1)) RBI Directions to AuditorsRBI direction to NBFC/Auditors of such NBFC in relation to books of accounts, balance sheet, profit and loss accounts, disclosures of liabilities in the books of accounts or any matters relating thereto for the purpose of proper assessment of the books of accounts. ((Section 45MA (1A)) Report U/s 227 of Companies Act, 1956Report under section 227(2) of companies act, 1956 should include the contents of report made under section 45MA(1A) about deposits held by the NBFC. (Sec 45MA(2)) Penalty : Rs. 5000/- for contravening the directions given u/s 45MA (Section 58B (4AA))22CA Bhavesh Vora JB Nagar CPE Study Circle
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NBFC Auditors Report Directions, 2008
JB Nagar Study Circle
CA
Bhavesh Vora
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08-09-2013