Statutory Audit Checklist for NBFCs – Complete Overview

Shubham Chauhan

05 Jan, 2021

The rapid growth of NBFCs, especially during the nineties, has led to a gradual blurring of the fine line between banks and NBFCs. Non-Banking Financial Companies (NBFCs) are entities that provide certain financial services but does not have a banking license. NBFCs are incorporated under the Companies Act 2013 or 1956 and are engaged in the business of loans and advances, acquisition of shares, stock, debentures issued by the government or local authorities. An audit is an essential element in the functioning of a company as well as for NBFCs. NBFCs need to obtain a certificate from Statutory Auditor that they are engaged in non-banking financial institutions holding a certificate of registration under Section 45-IA of the RBI Act, 1934, to prove their eligibility. In this blog, we shall read about some particular points that auditors follow at the time of the Statutory Audit of NBFCs.

What is Statutory Audit?

It is the type of audit which is mandated by the law. it is an essential audit of the final balance sheet of the company which is conducted every fiscal year.

Statutory Audit Checklist for NBFCs

Pointers that auditors follow at the time of Statutory Audit of a Company:

1. Auditors need to physically verify all the shares and securities held by an NBFC. If any security is lodged with an institution or a bank, a certificate from the bank/institution to that effect must be verified.
2. During a statutory audit, Auditors need to verify that the credit facilities extended and investments made by the concerned NBFC are within the prescribed ceiling. According to NBFC prudential norms, NBFCs are not supposed to lend more than 15% of its funds to any single borrower and not more than 25% to any single group of borrower.
3. Verify that NBFC has not advanced any loans against the security of its assets and shares.
4. Auditors also have to check bills/contract notes received from brokers regarding the prices concerning the stock market quotations on the respective dates

Note: It needs to be noted that, RBI^[1] has decided to merge three categories of NBFC i.e. Asset Finance Company, Loan Companies and Investment Companies into a new category called NBFC- Investment and Credit Company( NBFC-ICC)

1. Auditors check whether the investments are valued in as per the NBFC Prudential Norms Directions. They are also supposed to check that an adequate provision for fall in the market value of securities, wherever applicable, have been made.
2. Gather the list of subsidiaries/ group companies from the management of the company and verify all the investments made in subsidiaries and group companies.
3. An auditor has to make sure that the requirements of AS 13 “Accounting for Investments” have been duly complied with by the NBFC.
4. Get a confirmation from the approved intermediary regarding securities deposited with/borrowed from it, at the year-end.
5. An auditor has to check whether each loan or advance was sanctioned properly or not. He needs to verify the conditions attached with the loan and advance which includes a limit on borrowings, interest, terms of repayment etc.
6. An auditor should verify the security obtained and the agreements which were signed if any with the concerned parties. He is supposed to discover the nature and value of security and the net worth of borrower.
7. Auditors also have to obtain balance confirmations from the concerned parties.
8.  It needs to be checked whether the NBFC has not lent/ invested in excess of the specific limits to any single borrower or group of borrowers as per NBFC Prudential Norms Directions.
9. Auditors should check whether the NBFC has not advanced any loan against the security of its own shares.
10. An auditor should check whether the NBFC has a proper system of appraisal and follow up of loans and other advances. Moreover, an auditor may analyse the trend of its recovery performance to ascertain that NBFC does not have an undue high level of Non-Performing Assets (NPAs).

Read our article:Prudential Norms for NBFC Non-Deposit Taking

Statutory Audit Checklist of Hire Purchase Finance Company

1. To find out whether the NBFC has an adequate appraisal system for extending Hire Purchase Finance. The appraisal system is concerned with obtaining information regarding the creditworthiness of the hirer, his experience as well as the assets owned.
2. Auditors need to verify that the payment for acquiring any asset should be made directly to the dealer/supplier. Moreover, the original invoice should be drawn out in the name of the NBFC.
3. When there is a high-value hire purchase of items like machinery and other equipment, an auditor should evaluate the whole transaction. In some cases, the auditor does a physical verification as well, mainly when there is a doubt in his mind regarding the genuineness of the transaction made.
4. Auditors also have to verify that the assets given on hire purchase are adequately insured.

Statutory Audit Checklist of Equipment Leasing Company Finance

1. To find out whether the NBFC has an adequate appraisal system for extending equipment leasing finance.
2. An Auditor has to confirm whether the NBFC has an adequate system for monitoring whether the assets have been adequately insured against. Moreover, the auditor has to check whether the maintenance of the leased assets is being carried out by the lessee.
3. Auditors need to verify the lease agreement entered into with the lessee in respect of the equipment given on lease.

Conclusion

NBFCs conduct audits to check whether they have complied with prescribed norms to avoid penalty. Statutory Audit is a mandatory action performed every fiscal year. Unlike the Internal Audit, a statutory audit is mandatory. An independent Chartered Accountant who is independent of the business conducts the audit. The checklist given above for the Statutory Audit of NBFCs should be kept in mind by the NBFCs to ensure that the accounts published by the company are genuine and authentic.