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ultimately result in the NBFC having an alarmingly high level of NPAs.

3. Registration with the RBI - Section 45-IA of the RBI Act, 1934, has made it incumbent on the part
of all NBFCs to comply with registration requirements and have minimum net owned funds. An
auditor should obtain a copy of the certificate of registration granted by the RBI or in case the
certificate of registration has not been granted, a copy of the application form filed with the RBI
for registration. It may particularly be noted that NBFCs incorporated after 9th January, 1997 are
not entitled to commence business without first obtaining a registration certificate from the RBI.
An auditor should, therefore, verify whether the dual conditions relating to registration with the
RBI and maintenance of minimum net owned funds have been duly complied with by the
concerned NBFC. The auditor should ascertain whether investment in prescribed liquid assets
have been made and whether quarterly returns as mentioned above have been regularly filed
with the RBI by the concerned NBFC.

4. The auditors must ascertain whether the company properly classified as per the requirements of
various regulations. In case, the NBFC has not been classified by the RBI, the classification of a
company will have to be determined after a careful consideration of various factors such as
particulars of earlier registration granted, if any, particulars furnished in the application form for
registration, company’s Memorandum of Association and its financial results.

5. NBFC Prudential Norms Directions - Check compliance with prudential norms encompassing
income recognition, income from investments, accounting standards, accounting for
investments, asset classification, provisioning for bad and doubtful debts, capital adequacy
norms, prohibition on granting of loans by a NBFC against its own shares, prohibition on loans
and investments for failure to repay public deposits and norms for concentration of
credit/investments.

In the given situation, 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 difference of opinion between O and his
partner M regarding evaluation of internal control and verification of registration with RBI. As
discussed above NBFCs are not entitled to commence business without first obtaining a registration
certificate from the RBI. An auditor should, therefore, verify whether the dual conditions relating to
registration with the RBI and maintenance of minimum net owned funds have been duly complied with
by the concerned NBFC. Further, 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. Accordingly, contention of Mr. O regarding evaluation
of internal control system and verification of registration with RBI should not be part of the audit
procedure as it is part of internal audits only, is not correct.

QNO Audit of Deposit Mobilisation in NBFC Old Course – (N20E, M22M, M23M)
515.600 UNIQUE
CA Nadar is conducting the statutory audit of RHL Ltd., a non-banking financial company. It has branches
in various parts of India. The company with a focus on housing finance, has outstanding non convertible
debentures worth 150 Crores. The company reportedly missed interest payments of INR 15 Crores on its
debts because of inadequate liquidity. As a result, RHL Ltd. faced a series of downgrades by rating

agencies on its debts over the past two months. Rating was cut to D from A4 implying that the company
was in default or expected to be in default soon. What aspects CA Nadar should look into in relation to
the activity of mobilization of public deposits (particularly in relation to downgrading of credit facilities)
by RHL Ltd?
Answer CA Nadar has to ascertain whether the company has complied with the following aspects in
relation to the activity of mobilization of public deposits:-

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