Audit of Banks, NBFCs, Insurance and Other Regulated Entities
Domain 9 tests regulatory audits where RBI, IRDAI and other regulators add reporting and provisioning rules on top of the Companies Act.
Bank and NBFC focus
- Banks: income recognition and asset classification (IRAC); a loan is NPA when overdue more than 90 days; stop accruing income; classify substandard, doubtful and loss; make provisions; report through LFAR and statutory audit.
- NBFCs: applicable asset classification, capital and return requirements; statutory auditor reports under the relevant RBI directions.
- Insurance: IRDAI framework, solvency margin (150%), actuarial valuation of liabilities, reinsurance and investment norms.
Worked example
A term-loan instalment due on 1 April remains unpaid until 5 July, more than 90 days. The account becomes an NPA on 5 July; interest after classification is not recognised as income. If it has been NPA for less than 12 months, it is substandard. The auditor reasons from the due date and the 90-day rule, not from the client’s manual classification.
Traps
Treating a government guarantee as an automatic exclusion from NPA; netting overdue interest against fresh credits; relying on the bank’s NPA list without testing; and accepting insurance policy liabilities without evaluating the actuary’s work.