Audit of NBFC (Non-Banking Financial Companies)

November 18, 2024
Registrationwala

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Audit of NBFC (Non-Banking Financial Companies)

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Audit of NBFC (Non-Banking Financial Companies)

November 18, 2024

Registrationwala

Non-banking financial companies (NBFCs) are companies registered under the Companies Act, 2013. Their business involves offering loans and advances, acquisition of shares, stock, bonds, debentures and securities issued by the Government/local authority or other securities of marketable nature, leasing, insurance business, hire-purchase or chit business. However, institutions cannot be regarded as NBFCs if their principal business activities are agricultural activity, industrial activity or sale/purchase/construction of immovable property such as independent floor, flat, commercial building, etc.

Every NBFC incorporated in India is required to undergo audits. In this blog post, we’ll discuss the NBFCs’ audits.

What is an Audit?

Audit is an examination wherein an auditor physically checks inventory after looking over or inspecting various books of accounts. All registered companies in India must have their accounts audited by a chartered auditor in accordance with Section 139 of the Companies Act 2013. To make sure that businesses honestly, accurately, and in compliance with accounting standards portray their financial positioning, auditing is really important.

Requirements for NBFC Audits

Here are some audit requirements which must be fulfilled by NBFCs in India:

NBFCs in India with assets of Rs. 50 or more are required to have an audit committee in which at least three members must be the company’s board of directors.
System audit of the internal processes and system must be conducted by the NBFCs every two years.
According to the Reserve Bank of India's (RBI) guidelines, a statutory audit should be carried out under the joint audit of at least two audit firms for NBFCs with assets of at least Rs. 15,000 crore at the end of the previous fiscal year.
The NBFC audit must cover a range of areas such as minutes of board meetings, recovery system, assessing MoA & AoA, etc.

Types of NBFC Audits

There are three different types of audits for NBFCs in India i.e., Process Audit, Product Audit and System Audit. They are explained below:

Process Audit: Process Audit is conducted to make sure that the processes in the company are done in compliance with the guidelines issued by the governing bodies. The main purpose of performing this kind of NBFC audit is to ensure that a company process doesn’t include any activity that doesn’t comply with the guidelines.
System Audit: At the management level, this type of NBFC audit is carried out. The reason why it is carried out is to make sure that the NBFC organization’s system is properly developed and that everything works and complies with the specified requirements. A system audit includes different types of audits such as IT general controls audits, application controls audits, and security audits.
Product Audit: Any particular product or service is the subject of this kind of NBFC audit. Software, hardware, and processed materials are all included in or may be included in the product audit. The purpose of this audit is to make sure that the NBFCs meet the needs of the client, performance criteria, or specifications.

NBFC Audit’s Components

An auditor will plan an audit after sending a notification to the client or organization being audited. They will identify critical areas of inquiry and information to examine. Each component of NBFC audit process has been described below:

First meeting

The initial meeting between the auditors and top management typically takes place during the planning phase. The aim, goals, and scope of the audit are discussed in this official meeting between senior management and the auditors. The audit program, which may be adjusted in light of information discussed during the meeting, is also presented by the auditors.

NBFC Audit Fieldwork

Audit fieldwork is the first active auditing stage in the audit planning process. It is the data-gathering phase of an audit where the auditor assesses the company’s internal controls and compliance and tests records, transactions and resources of the business. For this, key employees may be interviewed by the auditor. Audit shall also perform sample document checks to make sure the company documents’ creation and retention practices are appropriate.

Preparing NBFC Draft Audit Report

A draft of the audit report has to be prepared by the auditors once the auditing team has completed reviewing the document and auditing fieldwork. For review and any suggested revisions, the draft report is circulated by the team.

Responding to Draft Audit Report

When the final revisions have been made to the audit report of NBFC, the final document is provided to management for reviewing and responding. After the management response has been received, an exit meeting may be scheduled with the NBFC being audited to close loose ends, clarify audit scope and answer relevant questions. Upon finalization, the audit report is distributed to all the necessary stakeholders.

NBFC Audit Report Feedback

The audited company, as the last step, implements the changes recommended in the audit report. Once implemented, the auditors review and check how well those changes helped to resolve the issues and problems. Until all the issues are resolved and the next audit cycle starts, feedback between the company and auditors continues.

Duty of Auditors for NBFCs

An auditor for NBFC has several responsibilities and duties. Some of them are as follows:

An audit must check whether an NBFC company being audited complies with the required accounting standards and prudential norms among other regulations.
They must evaluate the internal controls of the business and ensure their efficacy for prevention of fraud, mitigation of risks, and accuracy in financial reporting.
All the threats and vulnerabilities of an NBFC’s IT systems and security controls must be analyzed by the auditor.
If an NBFC is not compliant with requirements, the auditor must mention the non-compliance while preparing the audit report.
The auditor is responsible for verification of shares and securities held by the NBFC.
The effectiveness and efficiency of the NBFC's operations, as well as their adherence to the company's policies and processes, must be ensured by the auditor of NBFC.

Appointment of Auditors for NBFC

According to the RBI Circular (Notification no. DoS. CO. ARG / SEC . 01/ 08.91.001 / 2021-22), from financial year 2021-22 and onwards, commercial banks, UCBs and NBFCs including Housing Finance Companies are required to appoint statutory central auditors or statutory auditors. For the appointment of these auditors, NBFCs are not required to take prior approval of RBI. However, it is mandatory for all NBFCs to inform RBI within one month about such an appointment using Form A.

Understanding Auditor’s Report for NBFCs

The auditor’s report is stimulated by the Reserve Bank of India (RBI) under the auditor’s direction in accordance with Section 45MA of the RBI Act, 1934. The guidelines of RBI are applicable on auditors of all NBFCs whether they accept deposits or not. The audit report must be created as per Section 143 of the Companies Act, 2013, and the auditor must submit it to the company’s board of directors.

At the end of each financial year, the audit has to be carried out once. In addition to providing a separate report to the company's board of directors, the auditor's report on the NBFC Audit must explain why the auditor made all of the unfavorable or qualified statements about the report’s contents.

The NBFCs' regional office must receive the auditor's report on the NBFC audit at the end of the financial year. This needs to be completed within a month of the balance sheet being finalized, and no later than December 30 of that year.

Conclusion

NBFCs in India must ensure their compliance with the auditing requirements. This involves having their accounts audited by a qualified auditor. If you want to start your own NBFC company in India, connect with Registrationwala for assistance in the NBFC registration process.