Classification of NBFC :
A. NBFC is one whose principal business is that of receiving deposits or that of financial institution.
1. Equipment Leasing Company.
2. Hire Purchase Finance Company.
3. Investment Company.
4. Loan Company.
5. RNBC i.e. Residuary non-banking co. that receives deposits under any scheme.
B. MBFC (Mutual benefit Financial Co.) : i.e. Nidhi Co. notified by Central Government u/s 620 A of Companies Act.
C. MBC (Mutual Benefit Company) : i.e. potential Nidhi co. working on lines of Nidhi co. but not so notified by Sec. 620A of Companies Act and Central Government. Company having minimum net owned fund and preference share capital of 10 lacs.
D. MNBC (Miscellaneous Non-banking co.) : i.e. Chit Fund company. Where a company enters into an agreement with specified number of subscribers to subscribe a certain sum and everyone of them be entitled to a prize amount. (may be by lot).
AUDIT PROCEDURE 1. Ascertaining the business of the Company.
2. Evaluation of I.C. System.
3. Registration with RBI which is compulsory for companies having net owned funds of Rs.2 crores.
Also ascertain whether it has submitted quarterly return with RBI about liquid Assets within 15 days in specified form. Moreover, it must transfer at least 20% of its net profit to reserve fund before any dividend is declared.
4. NBFC Public Deposit Directions
(i) Public deposit in accordance with the credit rating assigned to it.
(ii) Interest calculations.
(iii) NBFC accepted public deposit or renewed it only after written application received by the depositor in a specified form.
(iv) Public deposits should be accepted only after advertisement or statement in lieu of advertisement has been filed with RBI.
(v) Check deposit register (payment on due date).
(vi) Investment in approved liquid assets and it should be kept in safe custody.
(vii) Audited statement submitted within 15 days of Holding AGM to RBI.
(viii) Annual Return within 6 months from close of year submitted to RBI.
(ix) If not accepting deposits, see Board resolution in this behalf.
(x) For Group holding investment company, see board resolution to identify the group.
5. NBFC Prudential Norms Directions
(i) Compliance with income recognition and Accounting Standards, etc.
(ii) Classification as Standard / Sub-standard / Doubtful / Loss Asset.
(iii) Income from NPA on realization basis.
(iv) Previous year’s NPA A/c. continue or not.
CHECK-LIST FOR NBFC 1. Equipment Leasing Finance Company:
(i) Check whether proposals for equipment Leasing are accepted only after proper credit appraisal.
(ii) The auditor should verify the adequacy of system in place for ensuring installation of assets and their periodical physical verification.
(iii) The auditor should check the system to monitor whether Asset is adequately insured and properly maintained should be in place.
(iv) Verify the lease agreement.
(v) The auditor should ensure that leasing transactions are classified and accounted as per AS-19 “Lease”.
(vi) Ensure that the provisions relating to asset classification, provisioning and income recognition laid down for lease financing by NBFCs are observed.
2. Hire Purchase Finance Company
i. The auditor should ascertain whether there is an adequate appraisal system for extending hire-purchase finance.
ii. The auditor should verify that payments for assets are made directly to the vendor and the assets are property charged in the name of the NBFC.
iii. The auditor should ascertain the adequacy of system in place to ensure installation of the asset and their periodic physical verification.
iv. If the finance is against vehicles, the registration certificate should contain an endorsement in favour of the NBFC.
v. Auditor should verify the system to ensure that hirer have not sold the assets or encumbered them.
vi. Whether hire-purchase instalments are received regularly.
vii. The auditor should verify that hire purchase assets are adequately insured.
viii. Check the valuation of goods sold on hire purchase and goods repossessed.
ix. Examine the method of accounting followed for appropriation of finance charges over the period of hire purchase contract.
3. Investment Company
(i) The Auditor should physically verify the investment certificate. If these are lodged with another institute/bank obtain a certificate to that effect.
(ii) Verify whether investments made by the NBFC are within limits.
Same is the case with investment.
Lending + investments
(iii) Verify that no loans have been advanced on the security of its own share.
(iv) Verify whether income in the form of interest, dividend and capital gains is properly recognized.
(v) Test Check the bills/contract notes received from brokers w.r.t. prices in the stock market on the respective dates.
(x) Check the investments made in subsidiary / group companies for basis for price paid, quantum of investment made etc.
(xi) Ascertain that investments in unquoted debentures and bonds have not been classified as investments but as term loans for the purpose of asst classification, provisioning and income recognition.
(xii) Incase of securities lent / borrowed under securities lending scheme of SEBI, verify the terms and conditions of the agreement.
4. Loan Company
i. Ascertain whether there is system in place for proper appraisal, and sanction of loans.
ii. Verify the terms & conditions of loan agreement and security obtained.
iii. Check whether adequate records are maintained as regards the bill discounting facilities.
iv. Check whether the loans are within the limits specified for single and group borrowers.
v. No loans should be given of the security of NBFCs own shares.
vi. Check whether norms for asset classification, provisioning and income recognition as specified for credit facilities have been adhered to.
vii. The auditor may also obtain balance confirmation from the borrowers.
viii. Check whether there is adequate system to ascertain creditworthiness of client for co.
engaged in business of providing short term fund in ICD market.
AUDIT OF BANK BORROWERS
⇒ For those Non-corporate Borrowers enjoying working Capital Limits of Rs.25 lacs and above from the Banking System.
⇒ Term Borrowing includes (for purpose of limit) : (i) Packing Credit facility.
(ii) Cash Credit facility
(iii) Loans – Secured and Unsecured.
(iv) O/D.
(v) Deferred Payment facility.
(vi) Guarantee (a) Performance, (b0 financial.
(vii) Bill Discounting facility.
(viii) Any other Credit facility.
⇒ To submit such audited statement and report to concerned bank, at earliest but not later than 6 months from the close of Accounting year.
⇒ AUDIT PROCEDURES
(i) Auditor to use his professional skills and experience and apply such audit tests as required by circumstances. Report is special purpose report as it is to be given to lending bank.
(ii) Consider materiality. Perform compliance procedures.
(iii) Obtain all relevant informat and explanation from the client being audited.
(iv) Entity may choose any Chartered Accountant.
(v) Auditor to obtain letter of engagement and list of books of A/c. / records maintained by the entity before undertaking audit assignment.
(vi) Check compliance with terms of documents etc. (Partnership/Trust Deed) so far as they relate to A/c. and audit.
(vii) Figures of immediately preceding year for comparisons (viii) (AAS-22 & 25).
(ix) Any material departure of A/c. from accepted principles / Policy followed in preceding year should be reflected in notes to A/c. / Auditor’s report.
Special Auditor Report :
⇒ can be called by a lending bank, if circumstances wants. Submitted on quarterly basis, it is in addition to normal audit report which is on annual basis).
Information regarding : (i) Actual Production.
(ii) Actual production as % of rated capacity.
(iii) Sales.
(iv) Cash of goods sold / cost of production.
(v) Gross margin.
(vi) Interest on bank borrowing.
(vii) Interest on others.
(viii) Age-wise classification of raw material and finished goods.
(ix) Basis of valuation of raw material and finished goods.
(x) Age wise classification of B/R and other receivables due from domestic parties and for exports.
(xi) Some ratio etc. also be given.
(xii) Information w.r.t. following
(a) Balances at the end of each month of the quarter for major categories of stock, receivables and bills receivables;
(b) Tax assessments and payments made during the quarter.
(c) Actual disbursement of capital expenditure during the quarter;
(d) Outstanding contracts.
(e) The contingent liability;
(f) Investment made during the quarter and the income from such investments including profit on sale of investments.
(g) Loans given during the quarter;
(h) Loans raised during the quarter
(i) Overdue statutory liability at the end of the quarter;
(j) Amounts due but not paid at the end of the quarter in respect of (a) loans from banks, (b) public deposits and (c) other loans; and
(k) Figures of cash losses during the last 2 years to be stated on the basis of the annual accounts. If such accounts were not audited this fact should be stated.
AUDIT OF CO-OPERATIVE SOCIETIES
⇒ Auditor’s objective to see how far the decisions are in line with co-operative principles. Interest of members, provision in respective law of state and provision of bye-laws of society.
⇒ Managing Committee of society does the following :
(i) Custody and maintenance of moveable/un-moveable property.
(ii) Maintenance of account for receipt/payment.
(iii) Summon and attend all meetings.
(iv) Keeping all registers and records required by Act.
Auditor :
⇒ C.A. or diploma holder or having served as auditor in co-operative department of Government.
⇒ Appointment by Registrar and report submitted to him and to society also.
⇒ Audit fee may be w.r.t., working capital at prescribed rates.
⇒ Books of accounts required for :
(i) Sum of money received and expanded.
(ii) All sales and purchases and accounts of st. in hand.
(iii) Assets and liabilities.
Further different books can also be maintained by the society.
⇒ For limited lia. Society, no member other than a registered society can hold share-holding exceeding 20% of shares or Rs.1,000.
⇒ No loan to any person other than member. Special permission to grant loan to another society.
⇒ Accept loan/deposits from members/others subject to bye-laws.
⇒ Investment in :
(i) Central/State Co-operative Bank.
(ii) Approved securities.
(iii) Share security bond, etc. of any other society with limited liability.
(iv) Any co-operative bank if approved by Registrar.
(v) Other money permitted by Central/State Government.
⇒ 25% of pt. Transferred to Reserve Fund before distribution to members. Registrar may reduce it but at least 10% is even then required. It may use Reserve fund in Business of a society or may invest or for some public purpose.
⇒ Some State Act provide for compulsory contribution to education fund of state.
⇒ Over due debts for 6 m – 5 yr. and more than 5 years classified and reported upon.
⇒ Overdue interest excluded from interest outstanding in calculation of pt.
⇒ Some Act provide that Bad debts can be written off only if certified as Bad.
⇒ Auditor to see existence, ownership and valuation of asset.
⇒ Special report to registrar for e.g. :
(i) Personal profiteering by members.
(ii) Detection of fraud.
(iii) Mis-management.
(iv) Urban co-operative bank, disproportionate advances to vested interest groups.
(v) Reckless advancing
⇒ Then he provides a class to society. If society is unsatisfied, it may appeal to Registrar and he
(i) All necessary information and explanation.
(ii) A/c. give all information required by Act.
(iii) P & L true and fair view.
(iv) B/S true and fair view of state of affairs.
(v) Proper Books of Accounts maintained.
(vi) P&L and B/S in agreement with Books of Accounts.
Schedules to the report for :
(i) Transaction contrary to Act, rules and Bye-laws (ii) Sums not brought into A/c.
(iii) Material/property appearing as doubtful/bad.
(iv) Material irregularity in expenses/realization of money.
(v) Any other matter specified by registrar.
⇒ He may also have to answer two sets of questionnaire called audit memos.
(i) General nature (Applicable to all)
(ii) Practical nature (like for Housing agriculture, etc.)