Page 295 - CA Final PARAM Digital Book.

has not been taken to Statement of Profit and Loss.
o Income from investments;
NBFC prudential norms directions require dividend income on shares of
companies and units of mutual funds to be recognized on cash basis.
o Asset classification
▪ The auditor should verify the classification of advances and loans
as standard/ substandard/doubtful/loss and that proper provision
has been made in accordance with the directions.
▪ The auditor should check all NPAs of the previous years to verify
whether during the current year any payments have been
received or still they continue to be NPA during the current year
also.
o Provision for bad and doubtful debts;
o Capital adequacy norm;
o Investment Valuation

Check whether the investments have been valued in accordance with the
NBFC Prudential Norms Directions and adequate provision for fall in the
market value of securities, wherever applicable, have been made there
against, as required by the Directions.
Author’s Note
You may see difference in the answer given in PARAM with PM answer. Use our answer. We select
best and recent answer whenever there are different answers.

QNO NBFC-General Audit Procedures Old Course – (M22M,N22M)
515.300 TITANIUM CNO—NBFC.200
"OM & Co. is the statutory auditor of OTAPS NBFC Ltd. While planning the audit procedures to be done
during the audit of entity, there was a difference of opinion between Mr. O and his partner Mr. M. Mr. O
is of the opinion that evaluation of internal control system and verification of registration with RBI

should not be the part of audit procedure, as it is the part of interna l audit only. Briefly state what broad
areas should mandatorily become part of the audit procedure of OM & Co. for conducting the audit of
OTAPS NBFC Ltd.? Also comment whether contention of Mr. O is correct?"
Answer Following are broad areas that should be mandatorily part of the audit procedure for conducting the
audit of NBFC:

1. Ascertaining the Business of the Company - The first step in carrying out the audit of a NBFC is to
scan through the Memorandum and Articles of Association of the company, so as to acquaint
oneself with the type of business that the company is engaged into. The task of ascertaining the
principal business activity of any NBFC is of paramount importance since the very classification
of a company as a NBFC and its further classification would all depend upon its principal
business activity. Based on the classification of a company, it will be required to comply with the
provisions relating to limits on acceptance of public deposits as contained in the NBFC Public
Deposit Directions.

2. Evaluation of Internal Control System - An auditor should gain an understanding of the
accounting system and related internal controls adopted by the NBFC to determine the nature,
timing and extent of his audit procedures. An auditor should also ascertain whether the internal
controls put in place by the NBFC are adequate and are being effectively followed. In particular,
an auditor should review the effectiveness of the system of recovery prevalent at the NBFC. He
should ascertain whether the NBFC has an effective system of periodical review of advances in
place which would facilitate effective monitoring and follow up. The absence of a periodical
review system could result in non-detection of sticky advances at their very inception which may

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