CA

CA Final
Final Audit
Audit Amendment
Amendment Sheet
Sheet
May
May 2020
2020
This file contains amendments via RTP issued for May 2020 and Study
Material Issued for May 2020

Nov 2019

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 1 Professional Ethics (via RTP)

Meaning of network and network firm

What constitutes a network/Common attributes that must exist for a rm to be called a
Network?

It's a large structure aimed at:-

a Co-operation
b Profit or cost sharing or shares common ownership, control or management- Where the
larger structure is aimed at cooperation and the entities within the structure share common
ownership, control or management, it is deemed to be a network. This could be achieved by
contract or other means.

c Common quality control policies and procedures- Where the larger structure is aimed at
co-operation and the entities within the structure share common quality control policies and
procedures, it is deemed to be a network.

d Common business strategy- Where the larger structure is aimed at co-operation and the
entities within the structure share a common business strategy, it is deemed to be a network.
Sharing a common business strategy involves an agreement by the entities to achieve common
strategic objectives. An entity is not deemed to be a network firm merely because it co-operates
with another entity solely to respond jointly to a request for a proposal for the provision.

e The use of a common brand name-

£ Where the larger structure is aimed at co-operation and the entities within the structure
share the use of a common brand name, it is deemed to be a network. A common brand
name includes common initials or a common name.
£ A firm is deemed to be using a common brand name if it includes, for example, the
common brand name as part of, or along with, its firm name, when a partner of the firm
signs an audit report.
£ Even though a firm does not belong to a network and does not use a common brand name
as part of its firm name, it may give the appearance that it belongs to a network if it makes
reference in its stationery or promotional materials to being a member of an association of
firms.

f A significant part of professional resources

Professional resources include:
¦ Common systems that enable firms to exchange information such as client data, billing
and time records;
¦ Partners and staff;
¦ Technical departments that consult on technical or industry specific issues, transactions
or events for assurance engagements;
¦ Audit methodology or audit manuals; and
¦ Training courses and facilities.

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Page No-1
Clarifications on what will not constitute a network
1
Whether these larger structures create a network depends on the particular facts and circumstances
and does not depend on whether the firms and entities are legally separate and distinct. For example,
a larger structure may be aimed only at facilitating the referral of work, which in itself does not meet
the criteria necessary to constitute a network

2
The sharing of immaterial costs does not in itself create a network. In addition, if the sharing of costs
is limited only to those costs related to the development of audit methodologies, manuals, or
training courses, this would not in itself create a network.

3
An association between a firm and an otherwise unrelated entity to jointly provide a service or
develop a product does not in itself create a network.

4
An entity is not deemed to be a network firm merely because it co-operates with another entity solely
to respond jointly to a request for a proposal for the provision.

5
Where the shared resources are limited to common audit methodology or audit manuals, with no
exchange of personnel or client or market information, it is unlikely that the shared resources would
be significant and hence such an association would not constitute a network.

Forms of the network

1
A network can be constituted as a mutual entity which will act as a facilitator for the constituents of
the Network. In such a case the Network itself will not carry out any professional practice.

2
A network can be constituted as a partnership firm subject to the condition that the total number of
partners does not exceed twenty.

3
A network can be constituted as a Limited Liability Partnership subject to the provision of the
Chartered Accountant Act and Rules and such other laws as may be applicable.

4
A network can be constituted as company subject to the guidelines prescribed by Institute for
corporate form of practice and formation of management consultancy services company.

5
Network Firms shall consist of sole Practitioner/proprietor, partnership or any such entity of
professional accountants as may be permitted by the Act.

6
A firm is allowed to join only one network.

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Page No-2
7
Firms having common partners shall join only one Network.

Approval of name of network amongst firms registered with institute

1
The Network may have distinct name which should be approved by the Institute. To distinguish a
“Network” from a “firm” of Chartered Accountants, the words “& Affiliates” shall be used after the
name of the network and the words “& Co.” / “& Associates” shall not be used. The prescribed format
of application for approval of Name for Network is at Form 'A' (enclosed). Illustrative examples of
names of Network:-
a If the Network is a Mutual Entity or Partnership Firm: AB & Affiliates

b If the Network is a LLP: AB Affiliates LLP

c If the Network is a Limited Company: AB Affiliates P. Ltd/Limited

2
The Institute shall approve or reject the name of the Network and intimate the same to the Network
at its address mentioned in Form 'A' within a period which shall not be later than 30 days from the
date of receipt of the said Form.

3
Mere approval of the name of the Network shall not entitle the Network to carry on practice in its own
name.
Registration of Network with entities in India
1
After the name of a Network is approved as per provision under Guideline 5, the Institute same shall
reserve such name for a period of three (3) months from the date of approval.

2
The Network shall get itself registered with the Institute by applying in Form B within the period of 3
months, failing which the name assigned shall stand cancelled on the expiry of the said period.

3
Registration of Network with Institute is mandatory.

4
If different Indian firms are networked with a common Multinational Accounting Firm, they shall be
considered as a part of network.

Change in constitution of registered Network

In case of change in the constitution of registered Network on account of any entry into or exit from
the Network, the network shall communicate the same to the Institute by filing Form 'C' within a
period of thirty (30) days from the date of change in the constitution.
Listing of network with entities outside India
The duly authorized representative(s) of the Indian Member firm (s)/Member constituting the
Network with entities outside India shall file a declaration with the Institute in Form 'D' for Listing of
such Network within 30 days from the date of entering into the Network arrangement.
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Page No-3
 Audit Committee
2 & Corporate Governance (via RTP)
Resignation of statutory auditors from listed entities and their material subsidiaries
th
{circular no. CIR/CFD/CMD1/114/2019 dated 18 October, 2019}

Resignation of an auditor of a listed entity / its material subsidiary before completion of the audit of
the financial results for the year due to reasons such as pre-occupation may seriously hamper investor
confidence and deny them access to reliable information for taking timely investment decisions.
Hence, the statutory auditor has to comply with the conditions given in the circular.

Conditions to be complied with upon resignation of the statutory auditor of a listed

entity/material subsidiary w.r.t. limited review / audit report as per SEBI LODR Regulations,
are as under:-
Auditor Resigns within 45 Auditor Resigns after 45 days The auditor has signed the
d ay s f r o m t h e e n d o f a from the end of a quarter of a limited review/ audit report
quarter of a financial year financial year for the first three quarters of
a financial year
before such resignation, issue before such resignation, issue before such resignation,
the limited review/ audit report the limited review/ audit report issue the limited review/
for such quarter for such quarter as well as the audit report for the last
next quarter. quarter of such financial year
as well as the audit report for
such financial year.

Interlinking of Companies Act with SEBI (LODR)

As per Section 140(2) of Companies Act 2013, the auditor shall within a period of 30 days
from the date of resignation, intimate about such resignation to the Company and the
Registrar.

Sub-clause (7A) inserted under Clause A in Part A of Schedule Ill under Regulation 30(2) of SEBI
LODR Regulations requires detailed reasons to be disclosed by the listed entities to the stock
exchanges in case of resignation of the auditor of a listed entity as soon as possible but not later than
twenty-four hours of receipt of such reasons from the auditor.

So it is evident how both the provisions are interlinked with each other.

The Key of Success is to Focus

on GOALS, Not OBSTACLES.
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Page No-4
 Reporting with concerns with respect to the listed entity/its material
subsidiary to the Audit Committee (w.r.t Registration of Auditor)
a
In case of any concern with the management of the listed entity/material subsidiary such as non-
availability of information I non-cooperation by the management which may hamper the
audit process, the auditor shall approach the Chairman of the Audit Committee of the
listed entity and the Audit Committee shall receive such concern directly and immediately
without specifically waiting for the quarterly Audit Committee meetings and if proposed
resignation is due to non availability of information the auditor shall inform the Audit
Committee details of information sought and not provided by the Management.

b
On receipt of such information from the auditor relating to the proposal to resign as mentioned
above, the Audit Committee I board of directors, as the case may be, shall deliberate on the matter
and communicate its views to the management and the auditor.
c
Disclaimer in case of non-receipt of information: In case the listed entity/ its material
subsidiary does not provide information required by the auditor, to that extent, the auditor shall
provide an appropriate disclaimer in the audit report, which may be in accordance with the
Standards of Auditing as specified by ICAI/ NFRA. {SA 705}.

Other points to be remembered

1
In case an entity is not mandated to have an Audit Committee, then the board of directors of the
entity shall ensure compliance of this circular.
2
The Stock Exchanges are advised to bring the provisions of this circular to the notice of all listed
entities and their material subsidiaries and also disseminate it on their websites.
3
In case the auditor is rendered disqualified due to operation of any condition mentioned in Section
141 of the Companies Act, 2013, then the provisions of this Circular shall not apply.

{Amendments via Study Material-May 2020 Edition}

Concept of SR {Superior Rights} Equity shares has been inserted in various places
1
The Audit Committee shall have minimum three directors as members. Two-thirds of the members of audit
committee shall be independent directors, however, in case of a listed entity having outstanding SR
(Superior Rights) equity shares, the audit committee shall only comprise of independent directors.

2
The Board of Directors of every listed public company shall constitute the Nomination and Remuneration
Committee which shall comprise of at least three directors, all of whom shall be non-executive directors
and at least half shall be independent directors, however, in case of a listed entity having outstanding
SR equity shares, two thirds shall comprise of independent directors. Chairperson of the committee
shall be an independent director.

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Page No-5
 3
At least three directors, with at least one being an independent director, shall be members of the
Stake holder Relationship Committee. However, in case of a listed entity having
outstanding SR equity shares, at least two thirds of the Committee shall comprise of
independent directors.
4
The majority of members of Risk Management Committee shall consist of members of the Board of
Directors. However, in case of a listed entity having outstanding SR equity shares, at least
two thirds of the Risk Management Committee shall comprise of independent directors.
5
In case of listed company having outstanding SR equity shares, the auditor shall check that at least
half of the board of directors comprises of independent directors.
Composition of BOD (New Study Material)
1
The BOD of top 500 listed entities shall have atleast one independent women director by April 1, 2019
and the BOD of the top 1000 listed entities shall have atleast one independent women director by
April 1, 2020.{ The top 500 and 1000 entities shall be seen based on the market capitalisation of the
immediately preceding financial year.}

2
The BOD of the top 1000 entities { with effect from April 2019) and the top 2000 listed entities ( with
effect from April 1, 2020) shall comprise of not less than six directors.

3
No listed entity shall appoint a person or continue the directorship of any person as a non executive
director who has attained the age of 75 years unless a SR is passed and explanatory statement should
be annexed with the notice for such motion indicating justification for appointing such person.
4
A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in
not more than seven listed entities with effect from April 1, 2020.
5
A person shall not serve as an independent director in more than seven listed entities.
6
Any person who is serving as a whole-time director / managing director in any listed entity shall serve
as an independent director in not more than three listed entities.
7
In case of listed company having outstanding SR equity shares, the auditor shall check that at least
half of the board of directors comprises of independent directors.
8
With effect from April 1, 2020, the audit shall ensure that the Chairperson of the board of the top 500
listed entities is - (a) a non-executive director; (b) not related to the Managing Director or the Chief
Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013.

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Page No-6
Additional role of Audit Committee
Reviewing the utilization of loans and/ or advances from/investment by the holding company in the
subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower
including existing loans / advances / investments as on April 01, 2019.

Approval of Remuneration of Directors

1
w.e.f. April 01, 2019, approval of shareholders by special resolution shall be obtained every year, in
case the annual remuneration payable to a single non- executive director exceeds fifty percent of the
total annual remuneration payable to all non - executive directors.
2
The fees or compensation payable to executive directors who are promoters or members of the
promoter group, shall be subject to the approval of the shareholders by special resolution in general
meeting, if-

The annual remuneration payable to such executive director exceeds rupees 5 crore
a or
2.5 per cent of the net profits of the listed entity, whichever is higher; or

where there is more than one such director, the aggregate annual remuneration to
b such directors exceeds 5 per cent of the net profits of the listed entity:
3
Approval of the shareholders under this provision shall be valid only till the expiry of the term of such
director. For the purposes of this clause, net profits shall be calculated as per section 198 of the
Companies Act, 2013.
In this context, the Auditor should:-
1 2 3
Ascertain from the minutes of R e f e r t o t h e A r t i c l e s o f Examine the Report of the
t h e B o a r d o f D i r e c t o r s ' Association of the company, Board of Directors on
m e e t i n g s , s h a r e h o l d e r s ' wherever applicable corporate governance to be
meetings, relevant agenda included in the annual report
papers, notices, explanatory of the company and ascertain
statements etc., whether the whether the same contains the
remunerate ion of non- disclosures with respect to
executive directors has been remuneration of directors and
decided by the Board of compensation to non-
Directors after receiving prior e xe c u t i ve d i re c to r s. T h e
approval of the shareholders in auditor should correlate this
the general meeting data with that contained in the
financial statements

Sometimes later Becomes never,

DO IT NOW
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Page No-7
 Obligations with respect to employees including Senior Management,
KMP's, Directors and Promoters
The Board shall meet at least four times a year, with a maximum time gap of one hundred and twenty
days between any two meetings. The quorum for every meeting of the board of directors of the
top 1,000 listed entities with effect from April 1, 2019 and of the top 2,000 listed entities with
effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever
is higher, including at least one independent director.

The participation of the directors by video conferencing or by other audio-visual means shall also be
counted for the purposes of such quorum. The top 1,000 and 2,000 entities shall be determined on
the basis of market capitalisation, as at the end of the immediate previous financial year.

Risk Management Committee

a The Board of Directors shall constitute a Risk Management Committee

The majority of members of Risk Management Committee shall consist of members of the
b Board of Directors.

The Chairperson of the Risk Management Committee shall be a member of the Board of
c Directors and senior executives of the listed entity may be members of the committee.

d The risk management committee shall meet at least once in a year.

The Board of Directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to
e the committee and such other functions as it may deem fit and such function shall
specifically cover cyber security.

The provisions of this regulation shall be applicable to top 500 listed entities, determined
f on the basis of market capitalisation, as at the end of the immediate previous financial year.
g The Chairperson of the Committee shall be a member of the Board of Director.

Regulation - 24
1
At least one independent director on the board of directors of the listed entity shall be a director on
the board of directors of an unlisted material subsidiary, whether incorporated in India or not.

2
A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its
shareholding to less than 50 percent or cease the exercise of control over the subsidiary without
passing Special Resolution in its General Meeting except in cases where divestment is being made
under a scheme of arrangement duly approved by a Court/Tribunal or under a resolution plan
duly approved under section 31 of the Insolvency Code and such an event is disclosed to the
recognized stock exchanges within one day of the resolution plan being approved".
Everyday is a new opportunity
to change your life......
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Page No-8
 3
Selling , disposing and leasing of assets amounting to more than 20 percent of the assets of the
material subsidiary on an aggregate basis during a financial year shall require prior approval of
shareholders by way of Special Resolution in its General Meeting unless the sale/disposal/lease is
being made under a scheme of arrangement duly approved by a Court/Tribunal or under a
resolution plan duly approved under section 31 of the Insolvency Code and such an event is
disclosed to the recognized stock exchanges within one day of the resolution plan being
approved".

Meaning of material subsidiary

As per Regulation 16(c), “material subsidiary” shall mean a subsidiary, whose income or net
worth exceeds ten percent of the consolidated income or net worth respectively, of the listed entity
and its subsidiaries in the immediately preceding accounting year. [Explanation- The listed entity
shall formulate a policy for determining 'material' subsidiary.]

Regulation 24(1) provides that at least one independent director on the board of directors of the
listed entity shall be a director on the board of directors of an unlisted material subsidiary, whether
incorporated in India or not.

[Explanation- For the purposes of Regulation 24(1), notwithstanding anything to the contrary
contained in regulation 16, the term “material subsidiary” shall mean a subsidiary, whose income
or net worth exceeds twenty percent of the consolidated income or net worth respectively, of the
listed entity and its subsidiaries in the immediately preceding accounting year]
Please note that for the purpose of regulation 24, 20 % is to be considered for determining whether
the subsidiary is a material subsidiary or not and not 10 %. I have wrongly mentioned in some of the
videos that 10 % is to be considered in Regulation 24.

CA SANIDHYA SARAF www.apnamentor.com sanidhyasaraf@gmail.com

Page No-9
 Non-Banking Financial
3 Company
Types of NBFC
The different NBFCs are as follows:
1
Investment and Credit Company (ICC)- Investment and Credit Company means any company
which is a financial institution carrying on as its principal business - asset finance, the providing of
finance whether by making loans or advances or otherwise for any activity other than its own and the
acquisition of securities; and is not any other category of NBFC as defined by the RBI in any of its
Master Directions.

2
Infrastructure Finance Company (IFC)- A company which has net owned funds of at least ` 300 crore
and has deployed 75% of its total assets in Infrastructure loans is called IFC provided it has credit
rating of A or above and has a CRAR of 15% (with a minimum Tier I capital of 10 percent).

3
Systemically Important Core Investment Company (CIC-ND-SI)- Core Investment Companies (CIC)
having total assets of not less than ` 100 crores either individually or in aggregate along with other
CICs in the group and which raises or holds public funds are called as Systemically Important Core
Investment Companies (CICs-ND-SI).

4
Infrastructure Debt Fund (IDF-NBFC)- IDF-NBFC means a non-deposit taking Non Banking Financial
Company that has:
a Net owned funds of ` 300 crore or more; and

Which invests only in Public Private Partnerships(PPP) and post commencement

operations date (COD) infrastructure projects which have completed at least one
b year of satisfactory commercial operation and becomes a party to a Tripartite
Agreement.
5
Non-Banking Financial Company Micro Finance Ins tu on (NBFC-MFI)-

NBFC-MFI is a non- deposit taking NBFC which has at least 85% of its assets in the
a form of microfinance.
Such micro finance should be in the form of loan given to those who have annual
b income of ` 1,00,000 in rural areas and ` 160,000 in urban or semi urban areas.
Such loans should not exceed ` 1,00,000 and its tenure should not be less than 24
c months.
Further, the loan has to be given without collateral. Loan repayment is done on
d weekly, fortnightly or monthly installments at the choice of the borrower.
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Page No-10
6
Non-Banking Financial Company Factors (NBFC-Factors)- NBFC-Factor is a non-deposit taking NBFC
engaged in the principal business of factoring. The financial assets in the factoring business should
constitute at least 50 percent of its total assets and its income derived from factoring business
should not be less than 50 percent of its gross income.
7
Non-Operative Financial Holding Company - (NOFHC)- means a non-deposit taking NBFC
referred to in the "Guidelines for Licensing of New Banks in the Private Sector", issued by the RBI,
which holds the shares of a banking company and the shares of all other financial services
companies in its group, whether regulated by the Bank or by any other financial regulator, to the
extent permissible under the applicable regulatory prescriptions.

Audit procedures to be followed

1
Ascertain the business of the company- Review MOA/AOA, Minutes of Board/Committee
Meetings, Hold discussions with Top level Management etc.

2
Evaluation of Internal Control System- An auditor should also ascertain whether the internal
controls put in place by the NBFC are adequate and are being effectively followed. He should
ascertain whether the NBFC has an effective system of periodical review of advances in place which
would facilitate effective monitoring and follow up.

3
Registration with the RBI- The auditor is required to ensure whether company is required to be
registered u/s 45-IA of RBI Act & if yes, whether registration is obtained.

4
Check compliance of NBFC Acceptance of Public Deposit Directions (Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016).

5
Check compliance of Prudential norms by NBFC.

Public Deposit Directions (Non-Banking Financial Companies Acceptance of

Public Deposits (Reserve Bank) Directions, 2016
1
Credit Rating: Obtain a copy of the credit rating assigned to NBFC and check whether the public
deposits accepted/held by it are in accordance with the level of credit rating assigned to it.
2
Interest and Brokerage Payments: Test check the interest calculations in respect of public
deposits mobilised by a NBFC to ascertain that the NBFC has not paid interest in excess as per
specification.

Don’t wait for opportunity

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Page No-11
3
Public deposit:

Ascertain whether the NBFC has accepted or renewed any public deposit only after a
a written application form the depositor in the form to be supplied by the company.
Further ensure whether it contain the specific category of depositor, i.e., whether
b depositor is a shareholder or a director or a promoter or a member of public.
4
Deposit Register: Verify the deposit register maintained by a NBFC and test check the particulars
that have been entered therein in respect of each depositor with supporting receipts issued to the
depositors.

5
Custody of Investments: Check whether the investments made in approved liquid assets by a
NBFC holding public deposits have been lodged in safe custody with a designated scheduled
commercial bank.

6
Filing of Annual Return: Check whether the NBFC has filed its prescribed returns in a timely
manner.

7
NBFCs not accepting/holding public deposits: check whether a board resolution has been
passed by the NBFC to the effect that it has neither accepted any public deposits nor would it accept
any public deposits during the year.

Prudential norms by NBFC-Audit Checklist

1
Check compliance with prudential norms encompassing income recognition, income from
investments, accounting standards, accounting for investments, asset classification, provisioning
for bad and doubtful debts, capital adequacy norms etc.

2
Ensure that the Board of Directors of every NBFC granting/intending to grant demand/call loans
shall frame and implement a policy for the company.

3
Verify that advances and other credit facilities have been properly classified as standard/sub
standard/doubtful/loss and that proper provision has been made in accordance with the Directions.

4
In respect of Non-Performing Assets, an auditor should check whether the unrealised income in
respect of such assets has not been taken to the Profit & Loss Account on an accrual basis. Income
from NPAs should be accounted for on realisation basis only.

5
Check whether all accounts which have been classified as NPAs in the previous year also continue to
be shown as such in the current year also and if the same has been classified as performing, whether
payments have been received.

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Page No-12
Classification of funds by NBFC
a Cheating and Forgery.
Cash Shortages(treated as intentional fraud if >10000 and >5000, if detected by
b mgt/inspecting officer but not reported)
c Misappropriation and criminal breach of trust

d Fraudulent encasement through forged instruments, manipulation of Books of Accounts.

Irregularity in foreign exchange transactions. Reporting as fraud is required only if the
e intention to cheat/defraud is suspected /proved.

f Any other type of frauds

Reporting of Frauds to the RBI as per Master Direction

1
Frauds involving Rs 1 lakh and above
S NBFCs are advised to furnish case-wise quarterly progress reports on frauds involving ₹ 1 lakh
and above in the prescribed format only to Regional Office of the Bank, Department of Non-
Banking Supervision under whose jurisdiction the Registered Office of the applicable NBFC
falls within 15 days of the end of the quarter to which it relates.

S All frauds of ₹ 1 lakh and above shall be reported. { Do remember the classification of frauds}

S Fraud reports should also be submitted in cases where central investigating agencies have
initiated criminal proceedings suo moto and/or where the Bank has directed that they be
reported as frauds.

S Applicable NBFCs should also report frauds perpetrated in their subsidiaries and
affiliates/joint ventures.

2
Frauds committed by unscrupulous borrowers:- Frauds committed by unscrupulous borrowers
including companies, partnership firms/proprietary concerns and/or their directors/partners by
various methods such as Fraudulent discount of instruments or Fraudulent removal of pledged
stocks/disposing of hypothecated stocks without the NBFC's knowledge/inflating the value of stocks
in the stock statement and drawing excess finance; or Diversion of funds outside the borrowing units
etc.
3
Frauds involving ₹ 1 crore and above :-

S Where the amount involved in fraud is ₹ 1 crore and above, the reports in the prescribed format
shall be sent within 3 weeks from the date of detection of the fraud to Central Fraud
Monitoring Cell, RBI and to the Regional Office of the Department of Non-Banking Supervision
of the RBI under whose jurisdiction the Registered Office of the applicable NBFC falls.

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Page No-13
S Applicable NBFCs shall additionally report the fraud by means of a D.O. letter addressed to the
Chief General Manager-in-charge of the Department of Banking Supervision, RBI, Frauds
Monitoring Cell, Central Office Bengaluru and a copy endorsed to the Chief General Manager-
in-charge of the Department of Non-Banking Supervision, Reserve Bank of India, Central
Office within a week of such frauds coming to the notice of the applicable NBFC.

S He letter shall contain brief particulars of the fraud such as amount involved, nature of fraud,
name of the branch/office, names of parties involved , , names of officials involved, and
whether the complaint has been lodged with the Police.

4
Cases of attempted fraud:-
All individual cases involving ₹ 25 lakh or more should be continued to be placed before the Audit
Committee of applicable NBFC's Board.

Audit of NBFC- Investment and Credit Company/Audit check list

Common for all NBFC’s
Merging of NBFC's- three categories of NBFCs viz. Asset Finance Companies (AFC), Loan
Companies (LCs) and Investment Companies (ICs) into a new category called Investment
and Credit Company (NBFC-ICC).

Points to be covered in Audit of NBFC's { For example NBFC-ICC are given below (Learning 8
points are enough)
1
Physically verify all the shares and securities held by a NBFC. Where any security is lodged with an
institution or a bank, a certificate from the bank/institution to that effect must be verified.

2
Verify whether the NBFC has not advanced any loans against the security of its own shares.
3
Verify that dividend income wherever declared by a company, has been duly received by an NBFC and
interest wherever due [except in case of NPAs] has been duly accounted for

4
T est check bills/contract notes received from brokers with reference to the prices vis-à-vis the stock
market quotations on the respective dates.

5
Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board resolution
or obtain a management certificate to the effect that the investments so acquired are current
investments or Long T erm Investments.
6
Check whether the investments have been valued in accordance with the NBFC Prudential Norms
Directions and adequate provision for fall in the market value of securities, wherever applicable, have
been made there against, as required by the Directions.

CA SANIDHYA SARAF www.apnamentor.com sanidhyasaraf@gmail.com

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Obtain a list of subsidiary/group companies from the management and verify the investments made
in subsidiary/group companies during the year. Ascertain the basis for arriving at the price paid for
the acquisition of such shares.
8
Check whether investments in unquoted debentures/bonds have not been treated as investments
but as term loans or other credit facilities for the purposes of income recognition and asset
classification.
9
An auditor will have to ascertain whether the requirements of AS 13 “Accounting for Investments” or
other accounting standard, as applicable, (to the extent they are not inconsistent with the
Directions) have been duly complied with by the NBFC.
10
An auditor should examine whether each loan or advance has been properly sanctioned. He should
verify the conditions attached to the sanction of each loan or advance i.e. limit on borrowings, nature
of security, interest, terms of repayment, etc.
11
Obtain balance confirmations from the concerned parties.

12
Check whether the NBFC has not lent/invested in excess of the specified limits to any single borrower
or group of borrowers as per NBFC Prudential Norms Directions.

13
An auditor should verify whether the NBFC has an adequate system of proper appraisal and follow up
of loans and advances. In addition, he may analyse the trend of its recovery performance to ascertain
that the NBFC does not have an unduly high level of NPAs.
14
Check the classification of loans and advances (including bills purchased and discounted) made by a
NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and the adequacy
of provision for bad and doubtful debts as required by NBFC Prudential Norms Directions.

CA SANIDHYA SARAF www.apnamentor.com sanidhyasaraf@gmail.com

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