The Members of AU Small Finance Bank Limited
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
We have audited the accompanying financial statements of AU Small Finance Bank Limited("the Bank") which comprise the Balance sheet as at March 31 2019 the Profitand Loss Account the Cash Flow Statement for the year then ended and notes to thefinancial statements including a summary of significant accounting policies and otherexplanatory information.
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid financial statements give the information required by theBanking Regulation Act 1949 and the Companies Act 2013 as amended ("the Act")in the manner so required for the banking companies and give a true and fair view inconformity with the accounting principles generally accepted in India of the state ofaffairs of the Bank as at March 31 2019 its profit and its cash flows for the year endedon that date.
Basis for Opinion
We conducted our audit of the financial statements in accordance with the Standards onAuditing (SAs) as specified under section 143(10) of the Act. Our responsibilities underthose Standards are further described in the 'Auditor's Responsibilities for the Audit ofthe Financial Statements' section of our report. We are independent of the Bank inaccordance with the 'Code of Ethics' issued by the Institute of Chartered Accountants ofIndia together with the ethical requirements that are relevant to our audit of thefinancial statements under the provisions of the Act and the Rules thereunder and we havefulfilled our other ethical responsibilities in accordance with these requirements and theCode of Ethics. We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our audit opinion on the financial statements.
Key Audit Matters
Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the financial statements for the financial year ended March31 2019. These matters were addressed in the context of our audit of the financialstatements as a whole and in forming our opinion thereon and we do not provide aseparate opinion on these matters. For each matter below our description of how our auditaddressed the matter is provided in that context.
We have determined the matters described below to be the key audit matters to becommunicated in our report. We have fulfilled the responsibilities described in theAuditor's responsibilities for the audit of the financial statements section of ourreport including in relation to these matters. Accordingly our audit included theperformance of procedures designed to respond to our assessment of the risks of materialmisstatement of the financial statements. The results of our audit procedures includingthe procedures performed to address the matters below provide the basis for our auditopinion on the accompanying financial statements.
|Key audit matters ||How our audit addressed the key audit matter |
|(a) Identification of Non Performing Advances and provisioning for Advances (Refer Schedule 17.4 to the financial statements) |
|Loans and advances constitute a major portion of the Bank's assets and the quality of the Bank's loan portfolio is measured in terms of the proportion of non-performing assets (NPAs) to the total loans and advances. As at March 31 2019 the Bank has reported total gross loans and advances of ' 22994 crores (March 31 2018: ' 13412 crores) gross non-performing advances of ' 470 crores (March 31 2018: ' 270 crores) and a corresponding provision for non-performing advances of ' 176 crores (March 31 2018: ' 100 crores). || Our audit procedures included considering the Bank's accounting policies for NPA identification and provisioning and assessing compliance with the prudential norms prescribed by the RBI (IRAC Norms). |
| || Tested the operating effectiveness of the controls (including application and IT dependent controls) for appropriate classification of loans in the respective asset classes viz. standard sub-standard doubtful and loss with reference to IRAC norms at every month end. |
| || Performed test of details to verify whether the provisioning rates applied for respective asset classes were in accordance with the Bank's accounting policies and assessed the reasonableness of the rates used by the management wherever such rates were higher than the minimum rates prescribed by RBI. |
|Identification and provisioning of NPAs is governed by the prudential norms prescribed by the Reserve Bank of India (RBI). These norms prescribe several criteria for a loan to be classified as a NPA including overdue aging. || |
|Given the volume and variety of loans judgement is involved in the application of RBI norms for classification of loans as NPA and in view of the significance of this area to the overall audit of financial statements it has been considered as a key audit matter. || Performed inquiries with the credit and risk departments to ascertain if there were indicators of stress or an occurrence of an event of default in a particular loan account or any product category which need to be considered as NPA. Examined the early warning reports generated by the Bank's credit team on a monthly basis to identify loan accounts with performance issues. |
| || Considered the special mention accounts (SMA) reports submitted by the Bank to the RBI's central repository of information on large credits (CRILC) to assess whether any accounts from such reporting need to be considered as non-performing. |
| || Tested the Bank's controls to identify loan accounts of a common borrower to ensure all facilities availed by a delinquent customer are classified appropriately. Performed analytical procedures on various financial and non-financial parameters to test the completeness of accounts identified as NPA. |
| || Tested the arithmetical accuracy of computation of provision for Advances. |
|(b) IT systems and controls || |
|As a newly set-up small finance bank there has been a major enhancement in the information technology (IT) infrastructure of the Bank in the previous year. During the current year as the IT systems and processes continue to mature in view of the evolving business and regulatory landscape frequent changes in the technology environment have been carried out by the Bank. || For testing the IT general controls application controls and IT dependent manual controls we included specialized IT auditors as part of our audit team. The specialized team also assisted in testing the accuracy of the information produced by the Bank's IT systems. |
| || We tested the design and operating effectiveness of the Bank's IT access controls over the information systems that are critical to financial reporting. |
|The IT infrastructure is critical for smooth functioning of the Bank's business operations as well as for timely and accurate financial reporting. Accordingly the Bank has continued to invest in its IT infrastructure in the current year as well. || We tested IT general controls (logical access changes management and aspects of IT operational controls). This included testing that requests for access to systems were appropriately reviewed and authorized. |
|Due to the pervasive nature and complexity of the IT environment and considering that several systems and process have been implemented in recent past and as a result the IT control environment may not have matured it is considered a key audit matter. || We tested the Bank's periodic review of access rights. We inspected requests of changes to systems for appropriate approval and authorization. We considered the control environment relating to various interfaces configuration and other application controls identified as key to our audit. |
|Our areas of audit focus included user access management developer access to the production environment and changes to the IT environment. These are key to ensuring IT dependent and application based controls are operating effectively. || In addition to the above we tested the design and operating effectiveness of certain automated controls that were considered as key internal controls over financial reporting. |
| || Where deficiencies were identified we tested compensating controls or performed alternate procedures. |
Information Other than the Financial Statements and Auditor's Report Thereon
The Bank's Board of Directors is responsible for the other information. The otherinformation comprises the information included in the Annual report but does not includethe financial statements and our auditor's report thereon.
Our opinion on the financial statements does not cover the other information and we donot express any form of assurance conclusion thereon.
In connection with our audit of the financial statements our responsibility is to readthe other information and in doing so consider whether such other information ismaterially inconsistent with the financial statements or our knowledge obtained in theaudit or otherwise appears to be materially misstated. If based on the work we haveperformed we conclude that there is a material misstatement of this other information weare required to report that fact. We have nothing to report in this regard.
Responsibilities of Management and the Board of Directors for the Financial Statements
The Bank's Board of Directors is responsible for the matters stated in section 134(5)of the Act with respect to the preparation of these financial statements that give a trueand fair view of the financial position financial performance cash flows of the Bank inaccordance with the provisions of Section 29 of the Banking Regulation Act 1949accounting principles generally accepted in India including the Accounting Standardsspecified under section 133 of the Act read with Rule 7 of the Companies (Accounts) Rules2014 in so far as they apply to the Bank provision of section 29 of the Banking RegulationAct 1949 and the circulars guidelines and directions issued by Reserve Bank of India("RBI") from time to time.
This responsibility also includes maintenance of adequate accounting records inaccordance with the provisions of the Act for safeguarding of the assets of the Bank andfor preventing and detecting frauds and other irregularities; selection and application ofappropriate accounting policies; making judgments and estimates that are reasonable andprudent; and the design implementation and maintenance of adequate internal financialcontrols that were operating effectively for ensuring the accuracy and completeness ofthe accounting records relevant to the preparation and presentation of the financialstatements that give a true and fair view and are free from material misstatement whetherdue to fraud or error.
In preparing the financial statements management is responsible for assessing theBank's ability to continue as a going concern disclosing as applicable matters relatedto going concern and using the going concern basis of accounting unless management eitherintends to liquidate the Bank or to cease operations or has no realistic alternative butto do so.
Those Charged with Governance are also responsible for overseeing the Bank's financialreporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financialstatements as a whole are free from material misstatement whether due to fraud or errorand to issue an auditor's report that includes our opinion. Reasonable assurance is a highlevel of assurance but is not a guarantee that an audit conducted in accordance with SAswill always detect a material misstatement when it exists. Misstatements can arise fromfraud or error and are considered material if individually or in the aggregate theycould reasonably be expected to influence the economic decisions of users taken on thebasis of these financial statements.
As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statementswhether due to fraud or error design and perform audit procedures responsive to thoserisks and obtain audit evidence that is sufficient and appropriate to provide a basis forour opinion. The risk of not detecting a material misstatement resulting from fraud ishigher than for one resulting from error as fraud may involve collusion forgeryintentional omissions misrepresentations or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to designaudit procedures that are appropriate in the circumstances. Under section 143(3)(i) of theAct we are also responsible for expressing our opinion on whether the Bank has adequateinternal financial controls system in place and the operating effectiveness of suchcontrols.
Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis ofaccounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Bank'sability to continue as a going concern. If we conclude that a material uncertainty existswe are required to draw attention in our auditor's report to the related disclosures inthe financial statements or if such disclosures are inadequate to modify our opinion.Our conclusions are based on the audit evidence obtained up to the date of our auditor'sreport. However future events or conditions may cause the Bank to cease to continue as agoing concern.
Evaluate the overall presentation structure and content of the financial statementsincluding the disclosures and whether the financial statements represent the underlyingtransactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding among other matters theplanned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have compliedwith relevant ethical requirements regarding independence and to communicate with themall relationships and other matters that may reasonably be thought to bear on ourindependence and where applicable related safeguards.
From the matters communicated with those charged with governance we determine thosematters that were of most significance in the audit of the financial statements for thefinancial year ended March 312019 and are therefore the key audit matters. We describethese matters in our auditor's report unless law or regulation precludes public disclosureabout the matter or when in extremely rare circumstances we determine that a mattershould not be communicated in our report because the adverse consequences of doing sowould reasonably be expected to outweigh the public interest benefits of suchcommunication.
Report on Other Legal and Regulatory Requirements
1. The Balance Sheet and the Profit and Loss Account have been drawn up in accordancewith the provisions of Section 29 of the Banking Regulation Act 1949 read with theCompanies (Accounting Standards) Rules 2006 (as amended) specified under section 133 ofthe Act read with the Companies (Accounts) Rules 2014.
2. As required sub section (3) of section 30 of the Banking Regulation Act 1949 andthe appointment letter dated September 20 2018 we report that:
a. We have obtained all the information and explanations which to the best of ourknowledge and belief were necessary for the purpose of our audit and have found them tobe satisfactory;
b. The transactions of the Bank which have come to our notice have been within thepowers of the Bank; and
c. The financial accounting systems of the Bank are centralised and thereforeaccounting returns for the purpose of preparing financial statements are not required tobe submitted by the branches; we have visited 22 branches for the purpose of our audit.
3. As required by Section 143(3) of the Act we report that:
a. We have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purposes of our audit;
b. In our opinion proper books of account as required by law have been kept by theBank so far as it appears from our examination of those books;
c. The Balance Sheet the Profit and Loss Account the Cash Flow Statement dealt withby this Report are in agreement with the books of account;
d. In our opinion the aforesaid financial statements comply with the Companies(Accounting Standards) Rules 2006 (as amended) specified under section 133 of the Actread with the Companies (Accounts) Rules 2014 to the extent they are not inconsistentwith the accounting policies prescribed by RBI;
e. On the basis of the written representations received from the directors as on March31 2019 taken on record by the Board of Directors none of the directors is disqualifiedas on March 31 2019 from being appointed as a director in terms of Section 164 (2) of theAct;
f. With respect to the adequacy of the internal financial controls over financialreporting of the Bank with reference to these financial statements and the operatingeffectiveness of such controls refer to our separate Report in "Annexure 1" tothis report;
g. In our opinion the entity being a banking company the remuneration to thewhole-time director during the year ended March 31 2019 has been paid by the Bank inaccordance with the provisions of Section 35B (1) of the Banking Regulation Act 1949; and
h. With respect to the other matters to be included in the Auditor's Report inaccordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 as amended inour opinion and to the best of our information and according to the explanations given tous:
i. The Bank has disclosed the impact of pending litigations on its financial positionin its financial statements - Refer Note Schedule 12 Schedule 17.I and Schedule 18A -Note 32 to the financial statements;
ii. The Bank did not have any long-term contracts including derivative contracts forwhich there were any material foreseeable losses;
iii. There were no amounts which were required to be transferred to the InvestorEducation and Protection Fund by the Bank.
For S. R. Batliboi & Associates LLP
Firm's Registration No.: 101049W/E300004
per Amit Kabra
Membership No.: 094533
Date: April 22 2019
to the Independent Auditor's Report of Even Date on the Financial Statements of AUSmall Finance Bank Limited
Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section143 of the Companies Act 2013 (the "Act")
TO THE MEMBERS OF AU SMALL FINANCE BANK LIMITED
We have audited the internal financial controls over financial reporting of AU SmallFinance Bank Limited (the "Bank") as of March 31 2019 in conjunction with ouraudit of the financial statements of the Bank for the year ended on that date.
MANAGEMENT'S RESPONSIBILITY FOR INTERNAL FINANCIAL CONTROLS
The Bank's Management is responsible for establishing and maintaining internalfinancial controls based on the internal control over financial reporting criteriaestablished by the Bank considering the essential components of internal control stated inthe Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issuedby the Institute of Chartered Accountants of India. These responsibilities include thedesign implementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the orderly and efficient conduct of its businessincluding adherence to the Bank's policies the safeguarding of its assets the preventionand detection of frauds and errors the accuracy and completeness of the accountingrecords and the timely preparation of reliable financial information as required underthe Companies Act 2013.
Our responsibility is to express an opinion on the Bank's internal financial controlsover financial reporting based on our audit. We conducted our audit in accordance with theGuidance Note on Audit of Internal Financial Controls Over Financial Reporting (the"Guidance Note") and the Standards on Auditing as specified under section143(10) of the Companies Act 2013 to the extent applicable to an audit of internalfinancial controls both applicable to an audit of Internal Financial Controls and bothissued by the Institute of Chartered Accountants of India. Those Standards and theGuidance Note require that we comply with ethical requirements and plan and perform theaudit to obtain reasonable assurance about whether adequate internal financial controlsover financial reporting was established and maintained and if such controls operatedeffectively in all material respects.
Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls system over financial reporting and their operatingeffectiveness. Our audit of internal financial controls over financial reporting includedobtaining an understanding of internal financial controls over financial reportingassessing the risk that a material weakness exists and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. The proceduresselected depend on the auditor's judgement including the assessment of the risks ofmaterial misstatement of the financial statements whether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the internal financial controls system overfinancial reporting.
MEANING OF INTERNAL FINANCIAL CONTROLS OVER FINANCIAL REPORTING
A company's internal financial control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company's internal financial control over financialreporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles and that receipts andexpenditures of the company are being made only in accordance with authorisations ofmanagement and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorised acquisition use or disposition of thecompany's assets that could have a material effect on the financial statements.
INHERENT LIMITATIONS OF INTERNAL FINANCIAL CONTROLS OVER FINANCIAL REPORTING
Because of the inherent limitations of internal financial controls over financialreporting including the possibility of collusion or improper management override ofcontrols material misstatements due to error or fraud may occur and not be detected.Also projections of any evaluation of the internal financial controls over financialreporting to future periods are subject to the risk that the internal financial controlover financial reporting may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.
In our opinion the Bank has in all material respects an adequate internal financialcontrols system over financial reporting and such internal financial controls overfinancial reporting were operating effectively as at March 312019 based on the internalcontrol over financial reporting criteria established by the Bank considering theessential components of internal control stated in the Guidance Note on Audit of InternalFinancial Controls Over Financial Reporting issued by the Institute of CharteredAccountants of India.
For S. R. Batliboi & Associates LLP
Firm's Registration No.: 101049W/E300004
per Amit Kabra
Membership No.: 094533
Date: April 22 2019