NBFC Audit |

Audit of NBFC

What is an NBFC, or non-banking financial company?

A non-banking financial company, or NBFC, is an organization whose primary business is receiving deposits or that of a financial institution, such as lending, investing in securities, hire purchase finance, or equipment leasing, as defined by Section 45(I)(f) read with Section 45-I(c) of the RBI Act, 1934, as amended in 1997. Companies that finance physical or financial assets for productive or economic exercises would be classed as Asset Finance Companies, according to the RBI circular from December 6, 2006. The remaining businesses fall under the category of loan/investment companies. Different types of NBFCs are as follows-

Asset Finance Company

Investment company, as well as

Loan Company

NBFC Audit

Non-banking financial companies, or NBFCs, play a significant role in the Indian economy. These organizations are crucial to the equipment leasing, hire-purchase, lending, and investing industries. Through Chapter III B of the Reserve Bank of India Act of 1934, the Reserve Bank of India is charged with regulation and supervision with the following enumerated goals-

Ensuring the financial companies' healthy expansion.

To ensure that NBFC companies operate within the set framework and policy as a component of the financial system. Systematic aberrations are not caused by the NBFC Company's existence or operation.

To continue the level of surveillance and control that the Banks have over the NBFCs. This can be achieved by monitoring changes in this area of the financial system.

The Reserve Bank also gave the companies instructions regarding the acceptance of public deposits, income recognition, provisions for bad and doubtful debt, prudential norms like capital adequacy, asset classification, exposure norms, and additional measures to track the financial solvency reporting to RBI. The NBFC Audit has also been made mandatory, and the auditors have also been given instructions on it. Non-compliance if any, must be reported by the auditors to the RBI.

What kinds of NBFC audits are there?

According to the ISO 19011:2018 standards, there are three main types of audits, which are detailed below-

Process Audit: This kind of audit is carried out to ensure that corporate procedures adhere to the pre-set guidelines set forth by the governing bodies. Additionally, the main goal of conducting this kind of NBFC audit is to monitor that no company procedure contains any actions that violate these regulations.

Product Audit: These are conducted by NBFCs for any particular product or service. Hardware, processed materials, and software are all included in the auditing of the good or service. This audit is carried out to make sure that they adhere to the requirements set forth by the customer, the performance criteria, or the specifications.

System Audit: The management level is where this form of NBFC audit is carried out. It is carried out to make sure the system has been properly created, to determine whether everything is helpful, and to check whether the requirements have been met.

Who has the authority to audit an NBFC?

An eligible individual chosen by the company management conducts the NBFC Audit. The Chief Audit Executive (CAE) is in charge of it, and the Chief Audit Officer reports to the Audit Committee of the Board of Directors.

A CA conducts the Statutory Audit required by the Companies Act of 2013 in accordance with RBI standards. This particular type of audit is carried out by certified auditors who serve as external auditors and impartial parties.

Steps to conduct NBFC audit

The following are the measures required to perform an NBFC audit:

Company's Classification

Examining the Company's Memorandum of Association (MOA) and Articles of Association (AOA) is the first stage in conducting the NBFC Audit. In order to provide clarity and a better knowledge of the key responsibilities of the organization, the auditor may also review the Board or Committee Meeting minutes and speak with those at the top levels.

The requirements relating to the acceptance of deposits as provided in the NBFC Public Deposit Directions for NBFC Audit must be followed in accordance with the company's categorization as a loan company or investment company.

Internal control system evaluation

The management must keep an adequate accounting system that includes various controls according to the size and the business nature. To identify the type, timeliness, and scope of audit processes, an auditor must comprehend the accounting system and the corresponding internal controls acquired by the NBFC. The effectiveness of the recovery system and a periodic assessment of the advancements put in place must both be examined by the auditor as part of the NBFC Audit, as this will enable efficient examination and follow-up.

Adherence with Net Owned Fund

The RBI recently changed the procedures for getting a Certificate of Registration under Section 45-IA of the RBI Act in order to start a company. (DOR.CRE.060.CGM (MM), 17th March 2022) Notification No. From October 1, 2022, all NBFCs would need to have a minimum net-owned fund of Rs. 10 crore (Currently two crore). However, it should be noted that as of October 22, 2021, all current NBFCs having a certificate of registration and having a net owned fund of not more than Rs. 10 crores must have a net owned fund equivalent to Rs. 10 crores according to the below mentioned list -

Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016: NBFC Directions with Regard to Public Deposits

The auditor should ascertain that fact whether the NBFC is a loan company, investment company, hire purchase finance company, or equipment leasing company. The auditor must also identify the kind of the company to ensure that it complies with the relevant rules and regulations if the NBFC does not fit into any of the classifications.

The maximum amount of deposits is set according to the credit rating provided by the authorized credit rating agency. When a fall in credit rating is seen, an NBFC will be required to lower its public deposits within a given time limit. The non-banking financial institution that accepts or holds public deposits is required to provide the RBI with an audited balance sheet by the end of every fiscal year.

Prudential Guidelines for NBFCs

According to the company's income sources, such as investments, accounting standards, asset classification, accounting for investments, prohibition of grant in loan against own shares, provisioning for bad/doubtful debts, capital adequacy norms, etc., the auditor concerned with NBFC Audit examines the company's compliance with the necessary prudential norms.

Internal financial controls reporting

The term "internal financial controls," as used in Section 134 of the Companies Act of 2013, refers to the practices and procedures adopted by a company to ensure the smooth operation of its company. These practices and procedures include adherence to the company's bylaws, asset safeguarding measures, fraud detection, the preparation of financial reporting documents, and the upkeep of accounting records.

The internal financial controls and risk management systems must be evaluated by the non-banking financial company's audit committee. The effectiveness of an NBFC's internal financial controls must be reported by an auditor.

All publicly traded and unlisted companies, including micro and one-person company, are subject to the ICFR. In order to improve internal financial controls:

Documenting the risk matrix and updating the controls
Examination of controls (Phased Testing)
Planning and suggestions
Reduction of control flaws
Putting into practice the revised control structure
Internal Financial Control Management

Appointment of Auditors

The appointment of statutory central auditors/statutory auditors of commercial banks, UCBs, and NBFCs (including Housing Finance Companies) would be applicable for the financial year 2021–22 and further, according to the RBI Circular (Notification No. DoS.CO.ARG/SEC.01/08.91.001/2021–22). For the appointment of Statutory Central Auditors or Statutory Auditors, NBFCs are not required to seek RBI's prior approval; nonetheless, all NBFCs are required to notify RBI every year, via Form A (certificate) within one month of such an appointment.

What are the main auditing areas for NBFCs?

The Auditor's Report contains numerous elements that vary depending upon the type of activity that the NBFCs engage in. Following are some crucial details that should be included in an auditor's report-

Verification in person of each share or security that the company owns.

Fixed or not, NBFC prudential standards.

Keeping a check that no loans have been advanced by the NBFC against the corresponding shares.

If there happens any window dressing, any new loan will be used to pay down an existing loan.

For information on any purchases and sales of investments, consult the Board's minutes.

To determine whether the NBFC has assembled the requirements required by AS 13 "Accounting for Investment."

The NBFC Prudential Norms require that loans and advances from NBFCs be classified as Standard Assets, Sub-Standard Assets, Doubtful Assets, and Loss Assets. They also require that provisions be made for doubtful and bad assets.

To get each party's confirmation of their separate balances.

Verify whether the NBFC has given a single borrower the specified limits of investment or lending.

Additionally, verifying that the NBFC has a thorough appraisal and follows up on loans and advances.

To assure that the original invoice has been drawn out in the name of the NBFC and that the payment for purchasing any asset has been made straight to the supplier.

The registration certificate must have an endorsement to the hire purchase company in order to assure that the hire purchase is made against the vehicles.

Certifying that the assets provided for hire purchase are insured.

Dividend income on mutual fund shares and units recognized on a cash basis

It is necessary to receive an assurance from the depository for securities or shares owned through a depository.

Assuring that the NBFC has a suitable appraisal mechanism in place for extending equipment leasing and the financing earned via it.

Make sure the lease agreement you signed with the lessee included the equipment you were provided to rent.

According to the 2020 CARO (Companies (Auditor Report) Order), an auditor must submit a report.

What does an audit report mean in the context of NBFC auditing?

According to Section 45MA of the RBI Act, 1934, the Reserve Bank of India stimulates the auditor's report at the auditor's request. Whether an NBFC is receiving deposits or not, it is subject to the RBI standards for auditors of both registered and unregistered NBFCs.

The Auditor initially drafts a report and delivers it to the Company's board of directors. The auditor's report IS submitted in accordance with Section 143 of the 2013 Companies Act.

The information presented in an auditor's report varies depending on the situation, such as the registration certificate received from the banks, etc.

At the conclusion of each financial year, the audit is performed once.

The rationale for any unfavourable or qualified remark made by the auditor on the report's contents must be included in the auditor's report regarding the NBFC Audit, and the auditor must also submit a separate report to the company's board of directors.

At the conclusion of the financial year, the Regional Office of the NBFCs must receive the Auditor's Report detailing the NBFC Audit. This must be completed no later than December 30th of that year, one month after the day the Balance Sheet was finalized.

What do internal and statutory audits in the context of NBFC audit mean?

Statutory Audits

All company registered under the Companies Act are required to conduct this kind of audit. Internal audits and this kind of NBFC audit serve essentially the same goal. Following an audit of the company's book of accounts, the statutory auditor creates a report in accordance with established guidelines.

By examining the bank balances, bookkeeping records, financial transactions, etc., a Statutory Audit seeks to determine whether the company is giving a fair and accurate depiction of its operations.

Internal Audit

Internal auditing is the process used to assess a company's internal control structures, corporate governance, and account processing. Prior to conducting any inspections, internal audit's primary goal is to pinpoint issues and discover remedies. It aids in finding any problems with the organization's internal processes and, as a result, increases operational effectiveness.

Internal audits are crucial because they help discover and resolve issues that affect how the company operates. It increases the efficiency of the processes for governance, control, and risk management. An organization can prevent penalties from being levied on them by conducting an internal audit. Internal audits, unlike Statutory Audits, are not required to be performed. However, it is done to examine every process and other elements that a Statutory Auditor might find and the company might be held accountable for the fine. In accordance with RBI standards, no outsourcing of the internal audit function should be done; nevertheless, if internal experts are not available, experts, including former employees, can be retained on a contractual basis.

Function of the Chief Compliance Officer and the Framework for Compliance

A NBFC must do a compliance risk assessment as part of their yearly review in order to determine the main compliance risks, they face and develop a strategy to reduce those risks. According to RBI Notification No. DoS.CO.PPG./SEC.01/11.01.005/2022-23, which was issued on April 11, 2022, the report shall detail the status of the recommendations made in the inspection reports and other audits. Internal audits of the Compliance Function must be conducted on a regular basis, but the Internal Audit Function's risk assessment framework must take compliance risk into account.

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Our Blog

What is an NBFC, or non-banking financial company?

What kinds of NBFC audits are there?

Who has the authority to audit an NBFC?

What are the main auditing areas for NBFCs?

What does an audit report mean in the context of NBFC auditing?

What do internal and statutory audits in the context of NBFC audit mean?

Function of the Chief Compliance Officer and the Framework for Compliance

How you can contact Estabizz?
blog

Audit of NBFC

What is an NBFC, or non-banking financial company?

What kinds of NBFC audits are there?

Who has the authority to audit an NBFC?

Steps to conduct NBFC audit

What are the main auditing areas for NBFCs?

What does an audit report mean in the context of NBFC auditing?

According to Section 45MA of the RBI Act, 1934, the Reserve Bank of India stimulates the auditor's report at the auditor's request. Whether an NBFC is receiving deposits or not, it is subject to the RBI standards for auditors of both registered and unregistered NBFCs.

What do internal and statutory audits in the context of NBFC audit mean?

Function of the Chief Compliance Officer and the Framework for Compliance

How you can contact Estabizz?

Fill the form. Get a call back Submit the required documents. Track the progress of your application. Get the expected results.

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