CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 19)

19
Chapter Audit of Non – Banking Financial Statements

Q.1 Satyam Pvt Ltd is a company engaged in trading activities, it also has made investments in
shares of other Companies and advanced loans to group companies amounting to more than
50% of its total assets. However, trading income constitutes majority of its total income.
Whether the Company is an NBFC? [Study Material – ICAI]

Ans.: Classification of company as NBFC:

 In order to identify a particular company as Non-Banking Financial Company (NBFC), it
will consider both assets and income pattern as evidenced from the last audited balance
sheet of the company to decide its principal business.
 The company will be treated as NBFC when a company's financial assets constitute more
than 50% of the total assets (netted off by intangible assets) and income from financial
assets constitute more than 50% of the gross income. A company which fulfils both these
criteria shall qualify as an NBFC and would require to be registered as NBFC by Reserve
Bank of India.
Conclusion: Satyam Pvt Ltd is fulfilling the criteria on the asset side, but however is not
fulfilling the criteria on the income side, the company cannot be classified as a deemed
NBFC.

Q.2 You are appointed as the auditor of a NBFC registered with the RBI and which is accepting
and holding public deposits. You are considering your reporting requirement in addition to
your report made under Section 143 of the Companies Act, 2013 on the accounts of this
NBFC as per the prescribed Directions.
Please explain what points are required to be known in respect of separate report to be
given by you to the Board of Directors of this NBFC. [Study Material – ICAI]

Ans.: Matters to be included in Auditor’s Report in case of NBFC:

In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the
auditor shall also make a separate report to the Board of Directors of the Company on the
matters as specified in paragraph 3 of the NBFCs Auditor’s Report (Reserve Bank)
Directions, 2016:
Matters to be reported in case of all NBFC - Para 3 (A)
1. Whether the company has obtained a Certificate of Registration (CoR) from the Bank.
(Conducting Non-Banking Financial Activity without a valid CoR is an offence under the
RBI Act, 1934)

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CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 19)

2. In case of a company holding CoR issued by the Bank, whether that company is entitled
to continue to hold such CoR in terms of its Principal Business Criteria (Financial
asset/income pattern) as on March 31 of the applicable year.
3. Whether the NBFC is meeting the required net owned fund requirement as laid down in
Directions issued by RBI.
Matters to be reported in case of NBFC accepting public deposits - Para 3 (B)
Apart from the matters enumerated in (A) above, the auditor shall include a statement on the
following matters, namely-
(i) Whether the public deposits accepted by the company together with other borrowings
are within the limits admissible to the company as per the provisions of the NBFC
Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(ii) Whether the public deposits held by the company in excess of the quantum of such
deposits permissible to it under the provisions of NBFC Acceptance of Public Deposits
(Reserve Bank) Directions, 2016 are regularised in the manner provided;
(iii) Whether the NBFC is accepting "public deposit” without minimum investment grade
credit rating from an approved credit rating agency as per the provisions of NBFC
Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(iv) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank
has been correctly determined and whether such ratio is in compliance with the
minimum prescribed CRAR;
(v) In respect of NBFC referred to in clause (iii) above,
(a) whether the credit rating, for each of the fixed deposits schemes that has been
assigned by one of the Credit Rating Agencies listed in NBFC Acceptance of Public
Deposits (Reserve Bank) Directions, 2016 is in force; and
(b) whether the aggregate amount of deposits outstanding as at any point during the
year has exceeded the limit specified by the such Credit Rating Agency;
(vi) Whether the company has violated any restriction on acceptance of public deposit as
provided in NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
(vii) Whether the company has defaulted in paying to its depositors the interest and/or
principal amount of the deposits after such interest and/or principal became due;
(viii) Whether the company has complied with the prudential norms on income recognition,
accounting standards, asset classification, provisioning for bad and doubtful debts,
and concentration of credit/investments as specified in the Directions;
(ix) Whether the company has complied with the liquid assets requirement as prescribed
by the Bank and whether the details of the designated bank in which the approved
securities are held is communicated to the concerned office;

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CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 19)

(x) Whether the company has furnished to the Bank within the stipulated period the
return on deposits in prescribed form;
(xi) Whether the company has furnished to the Bank within the stipulated period the
quarterly return on prudential norms as specified in the NBFC Returns (Reserve
Bank) Directions, 2016;
(xii) Whether, in the case of opening of new branches or offices to collect deposits or in the
case of closure of existing branches/offices or in the case of appointment of agent, the
company has complied with the requirements contained in the NBFC Acceptance of
Public Deposits (Reserve Bank) Directions, 2016.

Q.3 Karma Pvt Ltd is a Non-Deposit Taking Non-Systemically Important NBFC registered with
Reserve Bank of India. The Statutory Auditor of the company is required to give a report to
the Board of Directors. What shall be the content of the Auditor’s Report to the Board.

[Study Material – ICAI]

Ans.: Matters to be included in Auditor’s Report in case of NBFC:

In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the
auditor shall also make a separate report to the Board of Directors of the Company on the
matters as specified in paragraph 3 of the NBFCs Auditor’s Report (Reserve Bank)
Directions, 2016:

Matters to be reported in case of all NBFC - Para 3 (A)

1. Whether the company has obtained a Certificate of Registration (CoR) from the Bank.
(Conducting Non-Banking Financial Activity without a valid CoR is an offence under the
RBI Act, 1934)
2. In case of a company holding CoR issued by the Bank, whether that company is entitled to
continue to hold such CoR in terms of its Principal Business Criteria (Financial
asset/income pattern) as on March 31 of the applicable year.
3. Whether the NBFC is meeting the required net owned fund requirement as laid down in
Directions issued by RBI.
Matters to be reported in case of NBFC not accepting public deposits - Para 3 (C)
(i) Whether the Board of Directors has passed a resolution for non-acceptance of any
public deposits;
(ii) Whether the company has accepted any public deposits during the relevant
period/year.
(iii) Whether the company has complied with the prudential norms relating to income
recognition, accounting standards, asset classification and provisioning for bad and
doubtful debts as applicable to it.

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CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 19)

Q.4 Krishna Pvt Ltd is primarily into the business of selling computer parts. However, the
company is fulfilling the Principal Business Criteria as at the balance sheet date i.e.
Financial Assets are more than 50 % of total assets and Financial Income is more than 50%
of Gross Income. What shall be the obligation of the Statutory Auditor in such a scenario?
[Study Material – ICAI]

Ans.: Obligations of Statutory Auditor of NBFC:

 A company will be treated as NBFC when a company's financial assets constitute more
than 50% of the total assets (netted off by intangible assets) and income from financial
assets constitute more than 50% of the gross income. In the given case, Krishna Pvt Ltd is
fulfilling the Principal Business Criteria i.e. Financial Assets are more than 50 % of total
assets and Financial Income is more than 50 % of Gross Income.
 In such a scenario, the statutory auditor has an obligation to submit exception report to
the RBI. As per Para 5 of NBFC Auditor’s Report (Reserve Bank) Directions, 2008
provides that where, in the case of a NBFC, the statement regarding any of the items
referred to in para 3, is unfavourable or qualified, or in the opinion of the auditor the
company has not complied with:
(a) the provisions of Chapter IIIB of Reserve Bank of India Act, 1934; or
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) NBFC-Non-Systemically Important Non-Deposit taking Company (Reserve Bank)
Directions, 2016 and NBFC-Systemically Important Non-Deposit taking Company
and Deposit taking Company (Reserve Bank) Directions, 2016
it shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may
be, in respect of the company to the concerned Regional Office of the Department of Non-
Banking Supervision of the Bank under whose jurisdiction the registered office of the
company is located.
Note: Duty of the Auditor to submit exception report shall be to report only the
contraventions of the provisions of RBI Act, 1934, and Directions, Guidelines, instructions
and such report shall not contain any statement with respect to compliance of any of
those provisions.

Q.5 CA Nadar is conducting the statutory audit of RHL Ltd., a non-banking financial company. It
has branches in various parts of India. The company with a focus on housing finance, has
outstanding non convertible debentures worth Rs. 150 Crores. The company reportedly
missed interest payments of INR 15 Crores on its debts because of inadequate liquidity. As a
result, RHL Ltd. faced a series of downgrades by rating agencies on its debts over the past
two months. Rating was cut to D from A4 implying that the company was in default or
expected to be in default soon. What aspects CA Nadar should look into in relation to the
activity of mobilization of public deposits (particularly in relation to downgrading of credit
facilities) by RHL Ltd? [Nov. 20 – New Syllabus (5 Marks)]

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CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 19)

Ans.: Auditor’s procedure in relation to mobilization of public deposits in case of NBFC:

(i) The ceiling on quantum of public deposits has been linked to its credit rating as given
by an approved credit rating agency. In the event of a upgrading/downgrading of credit
rating, the auditor should bear in mind that the NBFC will have to increase/reduce its
public deposits in accordance with the revised credit rating assigned to it within a
specified time frame and should ensure that the NBF Chas informed about the same to
the RBI in writing.
(ii) In the event of downgrading of credit rating below the minimum specified investment
grade, a non-banking financial company, being an investment and credit company or a
factor, shall regularise the excess deposit as provided hereunder:
(a) with immediate effect, stop accepting fresh public deposits and renewing existing
deposits;
(b) all existing deposits shall run off to maturity; and
(c) report the position within 15 working days, to the concerned Regional Office of the
RBI where the NBFC is registered.
(d) No matured public deposit shall be renewed without the express and voluntary
consent of the depositor.

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