Audit checklist for investment and credit in Non-Banking Financial Company (NBFC)

Checklist related to Investments

  • Physical Verification

The auditor should physically verify the securities held by NBFC. Is there any security that is lodged with an institution for a bank robber a certificate from the bank/institution to the effect must be verified. 

  • Income recognition 

Verify that dividend income wherever declared by a company, has been duly received and accounted for. The recognition of dividend income on shares of company and units of mutual funds should be done on a cash basis as perNBFC Prudential Norms Directions. However, the NBFC has an option to account for dividend income on the accrual basis, if the same has been declared by the body corporate it’s AGM (Annual General Meeting), and established its right to receive the payment. Income from Bonds/Debentures of Corporate bodies is to be counted on an accrual basis only if the interest rate on these instruments is predetermined and interest is serviced regularly at not in arrears. 

  • Authorization 

Verify the board minutes for the purchase and sale of investments. 

  • Classification

Certain from the board resolution obtain a management certificate to the effect that the investments so acquired are current investments or long term investments. 

  • Valuation 

Check whether adequate provisions for fall in the market value of securities, wherever applicable, have been made there against, as required by the directions of NBFC Prudential Norms Directions and the investments have also been valued in accordance with the same.

Compliance of Accounting Standard-13 

An Auditor will have to ascertain whether the requirements of Accounting Standard 13 Accounting for Investments or another accounting standard, as applicable have been duly complied with by the NBFC.  

  • External confirmation 

Obtain confirmation from the depository regarding the shares/securities held by it on behalf of the NBFCIn respect of shares/securities held through the depository. Obtain confirmation from the approved intermediary regarding security deposited with / borrowed from it has at the year-end. 

Checklist related to credit 

  • Sanctioning 

Concerning examine whether each loan or advance has been properly sanctioned auditor should verify the conditions attached to the sanction of each loan or advance i.e. limit on borrowings, a limit on its interest, nature of security, terms of repayment, etc. 

  • Security 

The auditor should verify the security obtained and the agreement entered into, if any, with the concerned parties in respect of the advances given. He must ascertain the nature and value of security and the net worth of the borrower/guarantor to determine the extent to which an advance could be considered realizable. 

  • Loan against own share 

The auditor should verify the method of sanctioning the loan; he must check whether the NBFC has not advanced any loan against the security of its own shares. 

  • Compliance of Prudential norms 

He must check whether the NBFC has not lent/invested any amount which is in excess of the specified limits to any borrower whether he is a single party or in a group are as per  NBFC Prudential Norms Directions. 

  • Appraisal and follow up system 

The auditor should verify whether the NBFC has a properly defined channel and an adequate system of proper appraisal of loans and advances and they must follow up the same. In addition, he may analyze the trend of its recovery by taking the help of various reports generated through systems and the performance to ascertain that the NBFC does not have an unduly high level of NPAs. 

  • Classification 

Check the classification of loans and advances made by an NBFC into standard assets, sub-standard assets, and loss assets and the adequacy of provisions for bad and doubtful debts as required by the  NBFC Prudential Norms Directions.

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