July 2019

FROM PUBLISHED ACCOUNTS

HIMANSHU V. KISHNADWALA
Chartered Accountant

STATE BANK OF INDIA

 

Key Audit Matters

Key Audit Matters are those matters that in our professional judgement were of most significance in our audit of the Standalone Financial Statements for the year ended 31st March, 2019. These matters were addressed in the context of our audit of the Standalone Financial Statements as a whole and in forming our opinion thereon and we do not provide a separate opinion on these matters. We have determined the matters described below to be the Key Audit Matters to be communicated in our report:

 

                Key audit matter

How the matter was addressed in our audit

Sr. No.

 Key Audit Matters

Auditors’ Response

i

Classification of advances and identification of and provisioning for non-performing advances in accordance with the RBI guidelines (Refer Schedule 9 read with Note 3 of Schedule 17 to the financial statements).

 

Advances include bills purchased and discounted, cash credits, overdrafts loans repayable on demand and term loans. These are further categorised as secured by tangible assets (including advances against book debts), covered by bank / government guarantees and unsecured advances.

 

Advances constitute 59.38% of the Bank’s total assets. They are, inter alia, governed by income recognition, asset classification and provisioning (IRAC) norms and other circulars and directives issued by the RBI from time to time which provide guidelines related to classification of advances into performing and non-performing advances (NPA). The Bank classifies these advances based on IRAC norms as per its accounting policy No. 3.

 

Identification of performing and non-performing advances involves establishment of proper mechanism. The Bank accounts for all the transactions related to advances in its Information Technology System (IT System), viz., Core Banking Solutions (CBS) which also identifies whether the advances are performing or non-performing. Further, NPA classification and calculation of provision is done through another IT System, viz., Centralised Credit Data Processing (CCDP) Application.

 

The carrying value of these advances (net of provisions) may be materially misstated if, either individually or in aggregate, the IRAC norms are not properly followed.

Our audit approach towards advances with reference to the IRAC norms and other related circulars / directives issued by the RBI and also internal policies and procedures of the Bank includes the testing of the following:

 

-  The accuracy of the data input in the system for income recognition, classification into performing and non- performing advances and provisioning in accordance with the IRAC Norms in respect of the branches allotted to us;

 

- Existence and effectiveness of monitoring mechanisms such as internal audit, systems audit, credit audit and concurrent audit as per the policies and procedures of the Bank;

 

We have examined the efficacy of various internal controls over advances to determine the nature, timing and extent of the substantive procedures and compliance with the observations of the various audits conducted as per the monitoring mechanism of the Bank and RBI Inspection.

 

In carrying out substantive procedures at the branches allotted to us, we have examined all large advances / stressed advances while other advances have been examined on a sample basis including review of valuation reports of independent valuers provided by the Bank’s management.

 

Reliance is also placed on audit reports of other statutory branch auditors with whom we have also made specific communication.

 

We have also relied on the reports of external IT System audit experts with respect to the business logics / parameters inbuilt in CBS for tracking, identification and stamping of NPAs and provisioning in respect thereof.

 

Considering the nature of the transactions, regulatory requirements, existing business environment, estimation / judgement involved in valuation of securities, it is a matter of high importance for the intended users of the Standalone Financial Statements. Considering these aspects, we have determined this as a Key Audit Matter.

 

Accordingly, our audit was focused on income recognition, asset classification and provisioning pertaining to advances due to the materiality of the balances.

 

ii

Classification and valuation of investments, identification of and provisioning for Non-Performing Investments (Schedule 8 read with Note 2 of Schedule 17 to the financial statements).

 

Investments include investments made by the Bank in various government securities, bonds, debentures, shares, security receipts and other approved securities.

 

Investments constitute 26.27% of the Bank’s total assets. These are governed by the circulars and directives of the Reserve Bank of India (RBI). These directions of RBI, inter alia, cover valuation of investments, classification of investments, identification of non-performing investments, the corresponding non-recognition of income and provision there against.

 

The valuation of each category (type) of the aforesaid securities is to be done as per the method prescribed in circulars and directives issued by the RBI which involves collection of data / information from various sources such as FIMMDA rates, rates quoted on BSE / NSE, financial statements of unlisted companies etc. Considering the complexities and extent of judgement involved in the valuation, volume of transactions, investments on hand and degree of regulatory focus, this has been determined as a Key Audit Matter.

 

Accordingly, our audit was focused on valuation of investments, classification, identification of non-performing investments and provisioning related to investments.

 

Our audit approach towards investments with reference to the RBI Circulars / Directives included the review and testing of the design, operating effectiveness of internal controls and substantive audit procedures in relation to valuation, classification, identification of non-performing investments, provisioning / depreciation related to investments. In particular,

 

a. We evaluated and understood the Bank’s internal control system to comply with relevant RBI guidelines regarding valuation, classification, identification of Non-Performing Investments, provisioning / depreciation related to investments;

 

b. We assessed and evaluated the process adopted for collection of information from various sources for determining fair value of these investments;

 

c.  For the selected sample of investments in hand, we tested accuracy and compliance with the RBI Master Circulars and directions by re-performing valuation for each category of the security. Samples were selected after ensuring that all the categories of investments (based on nature of security) were covered in the sample;

 

d. We assessed and evaluated the process of identification of NPIs and corresponding reversal of income and creation of provision;

 

e. We carried out substantive audit procedures to re-compute independently the provision to be maintained and depreciation to be provided in accordance with the circulars and directives of the RBI. Accordingly, we selected samples from the investments of each category and tested for NPIs as per the RBI guidelines and re-computed the provision to be maintained in accordance with the RBI Circular for those selected samples of NPIs;

 

f. We tested the mapping of investments between the investment application software and the financial statement preparation software to ensure compliance with the presentation and disclosure requirements as per the aforesaid RBI Circular / directions.

iii

Assessment of provisions and contingent liabilities in respect of certain litigations including direct and indirect taxes, various claims filed by other parties not acknowledged as debt (Schedule 12 read with Note 18.9 of Schedule 18 to the financial statements):

There is high level of judgement required in estimating the level of provisioning. The Bank’s assessment is supported by the facts of the matter, their own judgement, past experience and advices from legal and independent tax consultants wherever considered necessary. Accordingly, unexpected adverse outcomes may significantly impact the Bank’s reported profit and the balance sheet.

Our audit approach involved:

 

a. Understanding the current status of the litigations / tax assessments;

b.  Examining recent orders and / or communication received from various tax authorities / judicial forums and follow-up action thereon;

 

c.  Evaluating the merit of the subject matter under consideration with reference to the grounds presented therein and available independent legal / tax advice; and

 

 

We determined the above area as a Key Audit Matter in view of associated uncertainty relating to the outcome of these matters which requires application of judgement in interpretation of law. Accordingly, our audit was focused on analysing the facts of the subject matter under consideration and judgements / interpretation of law involved.

d. Review and analysis of evaluation of the contentions of the Bank through discussions, collection of details of the subject matter under consideration, the likely outcome and consequent potential outflows on those issues.

 

 

 

 

YES BANK LTD.

 

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the standalone financial statements of the current period. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

Key audit matter

How the matter was addressed in our audit

Identification of Non-Performing Assets (NPAs) and provisions on advances

Charge: Rs. 20,836 million for year ended 31st March, 2019

Provision: Rs. 33,977 million as at 31st March, 2019

Refer to the accounting policies in the Financial Statements: Significant Accounting Policies – use of estimates and “Note 18.4.3 to the Financial Statements: Advances”

Significant estimates and judgement involved

 

Identification of NPAs and provisions in respect of NPAs and restructured advances are made based on management's assessment of the degree of impairment of the advances subject to and guided by the minimum provisioning levels prescribed under the RBI guidelines with regard to the prudential norms on income recognition, asset classification & provisioning, prescribed from time to time.

The provisions on NPA are also based on the valuation of the security available. In case of restructured accounts, provision is made for erosion / diminution in fair value of restructured loans, in accordance with the RBI guidelines. In addition, the contingency provision that the Bank has established in the current year on assets currently not classified as NPAs is based on management's judgement.

We identified identification of NPAs and provision on advances as a Key Audit Matter because of the level of management judgement involved in determining the provision (including the provisions on assets which are not classified as NPAs) and the valuation of the security of the NPA loans and on account of the significance of these estimates to the financial statements of the Bank.

Our key audit procedures included:

 

Design / Controls

Assessing the design, implementation and operating effectiveness of key internal controls over approval, recording and monitoring of loans, monitoring process of overdue loans (including those which became overdue subsequent to the reporting date), measurement of provisions, identification of NPA accounts and assessing the reliability of management information (including overdue reports). In addition, for corporate loans we tested controls over the internal ratings process, monitoring of stressed accounts, including credit file review processes and review controls over the approval of significant individual impairment provisions.

Evaluated the design, implementation and operating effectiveness of key internal controls over the valuation of security for NPAs and the key controls over determination of the contingency provision including documentation of the relevant approvals along with basis and rationale of the provision.

Testing of management review controls over measurement of provisions and disclosures in financial statements.

Involving our information system specialists in the audit of this area to gain comfort over data integrity and calculations, including system reconciliations.

 

Substantive tests

Test of details for a selection of exposures over calculation of NPA provisions including valuation of collaterals for NPAs as at 31st March, 2019; the borrower-wise NPA identification and provisioning determined by the Bank and also testing related disclosures by assessing the completeness, accuracy and relevance of data and to ensure that the same is in compliance with the RBI guidelines with regard to the Prudential Norms on Income Recognition, Asset Classification & Provisioning.

 

Key audit matter

How the matter was addressed in our audit

 

We also selected a number of loans to test potential cases of loans repaid by a customer during the period by fresh disbursement(s) to these higher risk loans.

 

We selected a sample (based on quantitative and qualitative thresholds) of larger corporate clients where impairment indicators had been identified by management. We obtained management's assessment of the recoverability of these exposures (including individual provisions calculations) and challenged whether individual impairment provisions, or lack of these, were appropriate.

 

This included the following procedures:

 

Reviewing the statement of accounts, approval process, board minutes, credit review of customer, review of Special Mention Accounts reports and other related documents to assess recoverability and the classification of the facility; and

 

For a risk-based sample of corporate loans not identified as displaying indicators of impairment by management, challenged this assessment by reviewing the historical performance of the customer and assessing whether any impairment indicators were present.

Information technology

 

IT systems and controls

 

The Bank’s key financial accounting and reporting processes are highly dependent on information systems including automated controls in systems, such that there exists a risk that gaps in the IT control environment could result in the financial accounting and reporting records being misstated. Amongst its multiple IT systems, five systems are key for its overall financial reporting.

 

In addition, large transaction volumes and the increasing challenges to protect the integrity of the bank's systems and data, cyber security has become a more significant risk in recent periods.

 

We have identified ‘IT Systems and Controls’ as Key Audit Matter because of the high level automation, significant number of systems being used by the management and the complexity of the IT architecture.

 

Our key IT audit procedures included:

 

We focused on user access management, change management, segregation of duties, system reconciliation controls and system application controls over key financial accounting and reporting systems.

 

We tested a sample of key controls operating over the information technology in relation to financial accounting and reporting systems, including system access and system change  management, programme development and computer operations.

 

We tested the design and operating effectiveness of key controls over user access management, which includes granting access right, new user creation, removal of user rights and preventive controls designed to enforce segregation of duties.

 

For a selected group of key controls over financial and reporting systems, we independently performed procedures to determine that these controls remained unchanged during the year or were changed following the standard change management process,

 

Other areas that were assessed included password policies, security configurations, system interface controls, controls over changes to applications and databases and that business users and controls to ensure that developers and production support did not have access to change applications, the operating system or databases in the production environment.

 

Security configuration review and related. Tests on certain critical aspects of cyber security on network security management mechanism, operational security of key information infrastructure, data and client information management, monitoring and emergency management.

Valuation of Financial Instruments (Investments and Derivatives)

Refer to the accounting policies in the financial statements: ‘Significant Accounting Policies – use of estimate,’ ‘Note 18.4.2 to the Financial Statements: Investments’ and ‘Note 18.4.6 to the Financial Statements: Accounting for derivative transactions’.

Subjective estimates and judgement involved

 

Investments

 

Investments are classified into ‘Held for Trading’ (‘HFT’), ‘Available for Sale’ (‘AFS’) and ‘Held to Maturity’ (‘HTM’) categories at the time of purchase. Investments, which the Bank intends to hold till maturity are classified as HTM investments.

 

Investments classified as HTM are carried at amortised cost. Where, in the opinion of management, a diminution other than temporary, in the value of investments has taken place, appropriate provisions are required to be made.

 

Investments classified as AFS and HFT are marked-to-market on a periodic basis as per the relevant RBI guidelines.

 

We identified valuation of investments as a Key Audit Matter because of the management judgement involved in determining the value of certain investments (bonds and debentures, commercial papers and certificate of deposits, security receipts) based on the policy and model developed by the bank, impairment assessment for HTM book and the overall significant investments to the financial statements of the Bank.

Our key audit procedures included:

 

Design/controls

 

Assessing the design, implementation and operating effectiveness of management's key internal controls over classification, valuation and valuation models.

 

Reading investment agreements / term sheets entered into during the current year, on a sample basis, to understand the relevant investment terms and identify any conditions that were relevant to the valuation of financial instruments.

 

Engaging our valuation specialists to assist us in evaluating the valuation models used by the bank to value certain instruments and to perform, on a sample basis, independent valuations of the instruments and comparing these valuations with the Bank's valuations.

 

Assessed the appropriateness of the valuation methodology and challenging the valuation model by testing the key inputs used such as pricing inputs, measure of volatility and discount factors. Compared the valuation methodology to criteria in the accounting standards / RBI guidelines.

Derivatives

 

The Bank has exposure to derivative products which are accounted for on fair value (mark-to-market) in the books of account.

 

The valuation of the Bank's derivatives, held at fair value, is based on a combination of market data and valuation models which often require a considerable number of inputs. Many of these inputs are obtained from readily available data, the valuation techniques for which use quoted market prices and observable inputs. Where such observable data is not readily available, then estimates are developed which can involve significant management judgement.

 

We identified assessing the fair value of derivatives as a Key Audit Matter because of the degree of complexity involved in valuing certain financial instruments and the degree of judgement exercised by management in identifying the valuation models and determining the inputs used in the valuation models.

Substantive tests

 

For sample of instruments we re-performed independent valuation where no direct observable  inputs were used. We examined and challenged the assumptions used by considering the alternate valuation method and sensitivity of other key factors;

 

Assessing whether the financial statement disclosures appropriately reflect the Bank's exposure to investments and derivatives valuation risks with reference to the requirements of the prevailing accounting standards and RBI guidelines.

 

 

 

BANDHAN BANK LTD.

 

Key Audit Matters

Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements for the financial year ended 31st March, 2019. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters. For each matter, below our description of how our audit addressed the matter is provided in that context.

 

We have determined the matters described below to be the Key Audit Matters to be communicated in our report. We have fulfilled the responsibilities described in the auditor's responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

 

Key audit matter

How the matter was addressed in our audit

Identification of Non-Performing Advances and provisioning for advances (refer Schedule 17.4.3 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 31st March, 2019, the Bank has

We considered the Bank's accounting policies for NPA identification and provisioning and assessing compliance with the prudential norms prescribed by the RBI (IRAC Norms);

reported total gross loans and advances of Rs. 4,023,463.28 lakhs (31st March, 2018: Rs. 2,991,327.29 lakhs), gross non­performing advances of Rs. 81,955.65 lakhs (31st March, 2018:

Rs. 37,314.06 lakhs) and a corresponding provision for non­performing advances of Rs. 59,123.91 lakhs (31st March, 2018: Rs. 20,023.68 lakhs).

 

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.

Tested the operating effectiveness of the controls (including application and IT dependent controls) for classification of loans in the respective asset classes, viz., standard, sub-standard, doubtful and loss with reference to IRAC norms;

Performed test of details to test whether the provisioning rates applied for respective asset classes were in accordance with the Bank's accounting policies and assessed the rates used by the management wherever such rates were higher than the minimum rates prescribed by RBI;

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.

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.

 

 

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 as NPA;

Reviewed the fraud listing and the fraud returns submitted by the Bank during the year to Reserve Bank of India (RBI) and verified that provisions are as per IRAC norms;

Performed analytical procedures on various financial and non-financial parameters to test accounts identified as NPA;

Tested the arithmetical accuracy of computation of provision for advances.

 

IT systems and controls

 

As a Scheduled Commercial Bank that operates on core banking solution across its branches, the reliability and security of IT systems plays a key role in the business operations. The Bank continued to be highly dependent on third party service providers for its core IT infrastructure. Since large volume of transactions are processed daily, the IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner.

 

The IT infrastructure is critical for smooth functioning of the Bank’s business operations as well as for timely and accurate financial accounting and reporting.

 

Due to the pervasive nature and complexity of the IT environment we have ascertained IT systems and controls as a key audit matter.

 

 

For testing the IT general controls and application controls, we included specialised IT auditors as part of our audit team. The specialised 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;

 

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 reviewed and authorised;

 

We inspected requests of changes to systems for approval and authorisation. We considered the control environment relating to various interfaces, configuration and other application controls identified as key to our audit;

 

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;

 

If deficiencies were identified, we tested compensating controls or performed alternate procedures.

 

 

HDFC BANK LTD.

 

Key Audit Matters

Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the standalone financial statements for the financial year ended 31st March, 2019. These matters were addressed in the context of our audit of the standalone financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

 

We have determined the matters described below to be the Key Audit Matters to be communicated in our report. We have fulfilled the responsibilities described in the ‘Auditor’s Responsibilities for the Audit of the Standalone Financial Statements’ section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the standalone financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying standalone financial statements.

 

Key audit matter

How the matter was addressed in our audit

Identification of Non-Performing Advances and provisioning of advances:

Advances constitute a significant portion of the Bank’s assets and the quality of these advances is measured in terms of the ratio of Non-Performing Advances (NPA) to the gross advances of the Bank. The Bank’s net advances constitute 65.84 % of the total assets and the gross NPA ratio of the Bank is 1.36% as at 31st March, 2019.

 

The Reserve Bank of India’s (RBI) guidelines on Income Recognition and Asset Classification (IRAC) prescribe the prudential norms for identification and classification of NPAs and the minimum provision required for such assets. The Bank is also required to apply its judgement to determine the identification and provision required against NPAs by applying quantitative as well as qualitative factors. The risk of identification of NPAs is affected by factors like stress and liquidity concerns in certain sectors.

 

The provisioning for identified NPAs is estimated based on ageing and classification of NPAs, recovery estimates, value of security and other qualitative factors and is subject to the minimum provisioning norms specified by RBI.

 

Additionally, the Bank makes provisions on exposures that are not classified as NPAs, including advances in certain sectors and identified advances or group advances that can potentially slip into NPA. These are classified as contingency provisions.

 

The Bank has detailed its accounting policy in this regard in Schedule 17 - Significant Accounting Policies under Note C - 2 Advances.

 

Since the identification of NPAs and provisioning for advances require significant level of estimation and given its significance to the overall audit, we have ascertained identification and provisioning for NPAs as a key audit matter.

The audit procedures performed, among others, included:

 

Considering the Bank’s policies for NPA identification and provisioning and assessing compliance with the IRAC norms;

 

Understanding, evaluating and testing the design and operating effectiveness of key controls (including application controls) around identification of impaired accounts based on the extant guidelines on IRAC.

 

Performing other procedures including substantive audit procedures covering the identification of NPAs by the Bank. These procedures included:

 

Considering testing of the exception reports generated from the application systems where the advances have been recorded;

 

Considering the accounts reported by the Bank and other Banks as Special Mention Accounts (SMA) in RBI’s central repository of information on large credits (CRILC) to identify stress;

 

Reviewing account statements and other related information of the borrowers selected based on quantitative and qualitative risk factors;

 

Performing 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. Examining the early warning reports generated by the Bank to identify stressed loan accounts;

 

Holding specific discussions with the management of the Bank on sectors where there is perceived credit risk and the steps taken to mitigate the risks to identified sectors.

 

With respect to provisioning of advances, we performed the following procedures:

 

Gained an understanding of the Bank’s process for provisioning of advances;

 

Tested on a sample basis the calculation performed by the management for compliance with RBI regulations and internally laid down policies for provisioning;

 

For loan accounts, where the Bank made provisions which were not classified as NPA, we reviewed the Bank’s assessment for these provisions.

 

Evaluation of open tax litigations (Direct and Indirect Tax)

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