Checklist of Statutory Audit of NBFCs

Overview of Check List of Statutory Audit of NBFCs

• Due to the dynamic growth of NBFCs during the past years, the gap between NBFC and bank has been very less. NBFCs do not have banking license as banks, but they provide some financial services.
• NBFCs are registered under the Companies Act 2016 and provide financial assistance by giving loans and advances, acquiring securities, etc.
• NBFCs are required to obtain a Statutory Auditor Certificate that they are employed in non-banking financial institutions having a certificate of registration under Section 45-IA of the RBI Act, 1934.
• Audit is an essential requirement for the functioning of NBFC company. An audit is important in an NBFC as a company.
• A license must be obtained by the NBFC that they are engaged in the business of a non-banking financial institution under section 45-IA of the RBI Act, 1934.

statutory audit

• This is an audit mandated by law/statute. It is conducted every financial year and is an important audit to finalize the NBFC balance sheet.

Statutory Audit Check List for NBFCs

Guidelines to be followed by the auditor at the time of statutory audit of NBFCs.

1. All shares and securities are to be physically verified by the Statutory Auditor. If any security is held with any bank or institution, a certificate in respect of the same shall be verified.
2. The auditor is also required to verify the investments made and the credit facilities extended by the NBFCs are within limits. As per the rules and regulations of NBFC Prudential Norms, NBFCs cannot lend more than 15% of their funds to a single borrower and more than 25% to a single group of borrowers.
3. The Statutory Auditor shall also verify any debt against its securities/shares/assets.
4. The auditor shall also verify that the contract notes/bills/invoices from the bankers regarding the prices relating to the stock market quotations at the relevant time/dates.

note: RBI has merged 3 types/categories of NBFCs i.e. Debt Companies, Asset Finance Companies, and Investment Companies into NBFCs – Investment and Credit Companies (NBFC-ICC).

5. The auditor will check that the investment made is in accordance with the prudential norms issued by RBI. The adequacy of the applicable provision shall also be considered in the fall in the market value of the security.
6. List the group companies or subsidiaries from the NBFC management, as well as the investments made in the group company or subsidiary company.
7. The Statutory Auditor shall ensure that the Indian Accounting Standard (AS) 13 “Accounting for Investments” requirements of the NBFCs are complied with.
8. The auditor will receive a confirmation from the approved intermediary in respect of the securities deposited with/from him at the end of the year.
9. The auditor shall also verify the validity of the loans or advances being properly sanctioned or not and the conditions attached thereto including interest, terms of repayment, borrowing limit etc.
10. The auditor will also check the validity of the securities received and the contracts signed, if any. The auditor will ascertain the net worth, the nature of the borrower and the value of the security.
11. The auditor will also verify the balance amount with the relevant parties of the NBFC.
12. Whether the NBFC has given credit/investment in excess of the specified limit to a single borrower or a group of borrowers as per NBFC prudential norms guidelines. will be verified by the auditor
13. There should be a proper check by the statutory auditors that the NBFC has not given any loan against its security/shares.
14. A proper valuation system under NBFCs will be verified by the Statutory Auditor. To check for unreasonably high levels of non-performing assets, the statutory auditor should also analyze the trend of its recovery performance.

Hire Purchase Finance Companies Statutory Audit Checklist

1. NBFCs shall have an adequate system of valuation for providing hire purchase finance. The appraisal system is essential to obtain information about the credibility and adequate creditworthiness of the renter, the experience of the tenant and the property owned.
2. The auditor shall also consider that payment for purchase of an asset should be made directly to the supplier/dealer/seller. The original challan will be in the name of NBFC only.
3. If the auditor does not find this to be reliable, the audit will physically verify the entire transaction if there is a purchase of high value items such as machinery and other equipment.
4. Whether the property given on hire purchase is insured or not will be verified by the statutory auditor.

Equipment Leasing Company Finance Company Statutory Audit Checklist

1. The NBFC will consider whether it has an adequate valuation system for providing equipment leasing finance.
2. This should be duly verified and confirmed by an auditor whether the NBFC has adequate systems in place for monitoring, and whether the assets are properly insured. The auditor must also ensure that the lessee is maintaining the leased asset.
3. The lease agreement entered into with the lessee in respect of the leased equipment shall be verified by the statutory auditor of the company.

summary

Every financial year NBFCs have to undergo audits to ensure that they have compiled with all the criteria so as to avoid any kind of penalty. A statutory audit is mandatory, internal audit on the other hand is not. In order to ensure that the accounts are correct, reliable and authentic, the NBFC will take into account the checklist provided by the Statutory Audit.