Report on Audit of the Standalone Financial Statements Opinion
1. We have audited the standalone financial statements of Andhra Bank (‘the Bank’), which comprise the Balance Sheet as at 31st March 2019, the Statement of Profit and Loss and the Statement of Cash Flows for the year then ended, and notes to financial statements including a summary of significant accounting policies and other explanatory information in which are included returns for the year ended on that date of 20 branches, Investment and International Banking Division audited by us and 1696 branches audited by statutory branch auditors. ‘the branches audited by us and those audited by other auditors have been selected by the Bank in accordance with the guidelines issued to the Bank by the Reserve Bank of India. Also included in the Balance Sheet, the Statement of Profit and Loss and Statement of Cash Flows are the returns from 1169 branches which have not been subjected to audit. ‘these unaudited branches account for 6.96 percent of advances, 15.82 per cent of deposits, 5.66 per cent of interest income and 14.14 per cent of interest expenses.
2. In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements give the information required by the Banking Regulation Act, 1949 in the manner so required for a bank and are in conformity with the accounting principles generally accepted in India and give:
a. true and fair view in case of the Balance sheet, of the state of affairs of the Bank as at 31st March, 2019;
b. true balance of loss in case of Profit and loss account for the year ended on that date; and
c. true and fair view in case of statement of cash flows for the year ended on that date.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing (SA’s) issued by ICAI. Our responsibilities under those Standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the code of ethics issued by the Institute of Chartered Accountants of India together with ethical requirements that are relevant to our audit of the financial statements in India, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the code of ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
4. Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. ‘these matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
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Key Audit Matter
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How our audit addressed the Key Audit Matter Other Matters
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1.
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Asset Classification and Provisioning in respect of Advances
We focused on Advances primarily because of the magnitude of this particular financial statement line item.
Banks are governed by the prudential norms issued by the Reserve Bank of India on Income recognition, Asset Classification and provisioning pertaining to Advances.
In terms of the said guidelines, Banks are required to classify Advances as “Non Performing Assets” (Sub Standard, Doubtful and Loss) based on prescribed rules involving time lines and to provide for their delinquency at specified percentages (15%, 25%, 40% and 100%) based on the period since when such advances remained in the non performing category.
Identification of such non-performing advances is carried out in the bank based on system identification by the Core Banking Solution (CBS) solution software in operation i.e.
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We have focused on the following judgements and estimates which could give rise to material misstatement or are potentially subject to management bias:
a) ’the completeness and timing of recognition of depletion in the value of security; and
b) ’the measurement of individually assessed provisions, which is dependent on the valuation of primary and collateral securities, realisable value of inventories, trade receivables, valuation of collateral securities, liquidation value, legal status, stage of insolvency proceedings in NCLT referred cases etc.
In obtaining sufficient audit evidence we:
a) Reviewed the operating effectiveness of key controls around the process of loan performance monitoring, assessment of drawing power in respect of Working Capital limits, evaluation of available security etc;
b) Evaluated and tested the key assumptions and judgements adopted by management in assessment of depletion in the value of securities and asset classification;
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finacle. In order to comply with the prudential guidelines, the software has various controls and logics embedded therein. Although, identification of NPAs is rule based and system driven, the management exercises significant judgement when estimating the realizable value of primary security and consequently the individual and collective provision for delinquency in respect of NPAs.
Advances comprise a substantial portion of the Bank’s assets and since the management exercises significant judgement in the asset classification and provisioning, this has been considered by us as a key audit matter.
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c) Performed procedures to obtain comfort on the accuracy of the collective impairment calculation process through recalculation of the provision made based on realisable value of security and other parameters;
d) For material non-performing advances, we assessed the adequacy of the recognised individual provision losses;
We also performed the following procedures :
a) Corrected all changes suggested by the Statutory Branch auditors with respect to income recognition, asset classification and provisioning.
b) Reviewed and placed reliance upon the Independent Auditors Report and Long Form Audit Reports (LFAR) of the Statutory Branch Auditors.
c) Reviewed and verified the correctness of the asset classification and provisioning in respect of all material advances in the branches audited by us.
d) Tested compliance with the Significant accounting policies of the bank and the extant guidelines of the Reserve Bank of India.
e) Checked the correctness of data input, logical controls in the software for the purpose of identification of non-performing assets and provisioning thereon across selected samples. Also reviewed the IT Audit reports for identifying any control weakness.
f) Ensured correction of all material misstatements observed by us during the course of our testing process with respect to income recognition, asset classification and provisioning.
g) Reviewed the Concurrent Audit Reports, Internal Inspection Reports (SIFA), Stock Audit Reports, Forensic Audit Reports, Valuation Reports etc. for identifying material control weakness.
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2.
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Assessment of Deferred tax asset (DTA) recognised by the bank.
Deferred tax is the tax effect of the timing differences between accounting income and taxable income for a period that originates in one period and are capable of reversal in one or more subsequent periods. “The same is governed by Accounting Standard (AS) 22 on “Accounting for Taxes on Income” issued by the Institute of Chartered Accountants of India.
In terms of para 17 of AS 22 as above, where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such DTAs can be realised.
As indicated in Schedule 11 (V), the net deferred tax assets amount to Rs. 2296.71 crore as at 31st March 2019.
We have considered the recoverability of such deferred tax assets on tax losses carried forward as a key audit matter due to the importance of management’s estimation and judgment in determining virtual certainty of sufficient future taxable income being available for future set off of the DTA recognised and the materiality of amounts at stake. ‘the managements estimation is also based on advice from independent tax advisors and there is an uncertainty in the outcome of these issue and judgment in the interpretation of law.
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In obtaining sufficient audit evidence we performed the following
audit procedures:
a) We used our tax specialists to assist us in assessing the appropriateness of the level of deferred taxes recognised in the balance sheet.
b) We tested the assumptions and judgments underlying the forecasts for the period over which the deferred tax would be set off by future taxable income.
c) We assessed the adequacy of the tax disclosure under Note 2.9 to the financial statements.
d) We reviewed the details of past income tax assessment orders, unresolved tax issues together with their impact on account of matters pending with appropriate assessing and appellate tax authorities, amount of allowable carried forward losses as per the Income Tax orders etc.
e) We reviewed the current status of the issues under litigation based on our understanding of the likely outcome of the issues under dispute and the possible tax outflow.
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Information other than the Financial Statements and Auditor’s Report thereon
5. ’the Bank’s Board of Directors is responsible for the other information. ‘the other information comprises the Corporate Governance Report (but does not include the financial statements and our Auditor’s Report thereon), which we obtained prior to the date of this Auditor’s Report, and the Directors Report including Annexures, thereon, if any, which is expected to be made available to us after the date of this auditor’s report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements of our knowledge obtained during the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of Management and ‘ttose Charged with Governance for the Standalone Financial Statements
6. ’the Bank’s Board of Directors is responsible with respect to the preparation of these standalone financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Bank in accordance with the accounting principles generally accepted in India, including the Accounting Standards issued by ICAI, and provisions of Section 29 of the Banking Regulation Act, 1949 and circulars and guidelines issued by the Reserve Bank of India (‘RBI’) from time to time. ‘this responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Bank and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Statements
7. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. ‘the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
- Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the 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’s report. However, future events or conditions may cause the bank to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Materiality is the magnitude of misstatements in the financial statements that, individually or in aggregate, makes it probable that the economic decisions of a reasonably knowledgeable user of the financial statements maybe influenced. We consider quantitative materiality and qualitative factors in (i) planning the scope of our audit work and in evaluating the results of our work; and (ii) to evaluate the effect of any identified misstatements in the financial statements.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Other Matter
8. We did not audit the financial statements/ information of 1169 branches included in the standalone financial statements of the Bank whose financial statements/ financial information reflect total advances of Rs. 12,428.97 crores as at 31st March 2019 and total interest of Rs. 1071.15 crores for the year ended on that date, as considered in the standalone financial statements. ‘the financial statements/ information of these branches have been audited by the branch auditors whose reports have been furnished to us, and in our opinion in so far as it relates to the amounts and disclosures included in respect of branches, is based solely on the report of such branch auditors.
Our opinion is not modified in respect of this matter.
Report on Other Legal and Regulatory Requirements
9. ’the Balance Sheet and the Profit and Loss Account have been drawn up in accordance with Section 29 of the Banking Regulation Act, 1949;
10. Subject to the limitations of the audit indicated in paragraphs 5 to 8 above and as required by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, and subject also to the limitations of disclosure required therein, we report that:
a) We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit and have found them to be satisfactory;
b) ’the transactions of the Bank, which have come to our notice, have been within the powers of the Bank; and
c) ’the returns received from the offices and branches of the Bank have been found adequate for the purposes of our audit.
11. We further report that:
a) in our opinion, proper books of account as required by law have been kept by the Bank so far as it appears from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches not visited by us.
b) the Balance Sheet, the Profit and Loss Account and the Statement of Cash Flows dealt with by this report are in agreement with the books of account and with the returns received from the branches not visited by us;
c) the reports on the accounts of the branches audited by branch auditors of the Bank under section 29 of the Banking Regulation Act, 1949 have been sent to us and have been properly dealt with by us in preparing this report; and
d) In our opinion, the Balance Sheet, the Profit and Loss Account and the Statement of Cash Flows comply with the applicable accounting standards, to the extent they are not inconsistent with the accounting policies prescribed by RBI.
FOR AGARWAL & SAXENA FOR RAY & CO FOR SANTOSH GUPTA & CO FOR G S M ADHAVA RAO
& CO
Chartered Accountants Chartered Accountants Chartered Accountants Chartered Accountants
FRN:002405C FRN:313124E FRN:009713N FRN:001907S
(CA ANIL K. SAXENA) (CA SUBRATA ROY) (CA MANOJ KUMAR) (CA MANIKYA PRASAD G)
PARTNER
(M.NO. 071600) PARTNER
(M.NO. 051205) PARTNER
(M.NO. 108603) PARTNER
(M.NO. 020105)
Place: Hyderabad
Date: 13.05.2019
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