Report on the Audit of the Standalone Financial Statements
Opinion
1. We have audited the accompanying standalone financial statements of Aavas Financiers Limited (‘the Company’), which comprise the Balance Sheet as at 31 March 2023, the Statement of Profit and Loss (including Other Comprehensive Income), the Statement of Cash Flow and the Statement of Changes in Equity for the year then ended, and notes to the standalone financial statements, including a summary of the significant accounting policies and other explanatory information.
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 Companies Act, 2013 (‘the Act’) in the manner so required and give a true and fair view in conformity with the Indian Accounting Standards (‘Ind AS’) specified under section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015 and other accounting principles generally accepted in India, of the state of affairs of the Company as at 31 March 2023, and its profit (including other comprehensive income), its cash flows and the changes in equity for the year ended on that date.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing specified under section 143(10) of the Act. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Standalone Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India (‘ICAI’) together with the ethical requirements that are relevant to our audit of the financial statements under the provisions of the Act and the rules thereunder, 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 standalone 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.
5. We have determined the matters described below to be the key audit matters to be communicated in our report.
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Key audit matters
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How our audit addressed the key audit matter
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Expected Credit Losses (ECL) on loan assets
At 31 March 2023, the Company reported total gross loans of C 1,154,788 lakhs (2022: C 911,774 lakhs) and C 7,161 lakhs of expected credit loss provisions (2022: C 6,432 lakhs).
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Ind AS 109 - Financial Instruments (‘Ind AS 109’), requires the Company to provide for impairment of its financial assets using the expected credit loss (‘ECL’) approach involving an estimation of probability of loss on such financial assets, considering reasonable and supportable information about past events, current conditions and forecasts of future economic conditions which could impact the credit quality of the Company’s loan assets.
Expected credit loss cannot be measured precisely but can only be estimated through use of statistics. The estimation of impairment loss allowance on loan assets involves significant judgement and estimates and applying appropriate measurement principles in case of loss events, including additional considerations on account of Reserve Bank of India guidelines in relation to COVID-19 regulatory package and restructuring.
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Our audit focused on assessing the appropriateness of management’s judgment and estimates used in the expected credit losses through the following procedures, but were not limited to the following procedures:
• Examined the Board Policy approving methodology for computation of ECL that addresses policies and procedures for assessing and measuring credit risk on the lending exposures of the Company in accordance with the requirements of Ind AS 109. Also, obtained the policy on moratorium and restructuring of loans approved by the Board of Directors pursuant to the RBI circulars/guidelines and ensured such policy is in compliant with the requirements of the RBI circulars / guidelines;
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Key audit matters
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How our audit addressed the key audit matter
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The expected credit loss is calculated using the percentage
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• Performed a walkthrough of the impairment loss allowance
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of probability of default (PD), loss given default (LGD) and
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process, and assessed the design and tested operating
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exposure at default (EAD) for each of the stages of loan portfolio.
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effectiveness of the key controls over completeness and
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Additional management overlay is estimated considering non
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accuracy of the key inputs (including loan book as at 31
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prediction and long-term future impact.
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March 2023) and assumptions considered for calculation,
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The Expected Credit Loss (“ECL”) is measured at 12-month
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recording and monitoring of the impairment loss recognized;
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ECL for Stage 1 loan assets and at lifetime ECL for Stage 2
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• Tested the completeness of loans and advances included in
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and Stage 3 loan assets. Significant management judgment
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the Expected Credit Loss calculations as of 31 March 2023 by
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and assumptions involved in measuring ECL is required with
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reconciling it with the balance as per loan balance register.
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respect to:
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We tested the data used in the PD and LGD model for ECL
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• Segmentation of loan book in buckets
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calculation by reconciling it to the source system. We tested assets in stage 1, 2 and 3 on a sample basis to verify that they
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• determining the criteria for a significant increase in credit risk
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were allocated to the appropriate stage;
• Obtained an understanding of the modelling techniques
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• factoring in future economic assumptions
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adopted by the Company including the key inputs and
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• techniques used to determine probability of default, loss
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assumptions;
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given default and exposure at default.
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• Tested the appropriateness of determining Exposure at
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These parameters are derived from the Company’s internally
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Default (EAD), PD and LGD, on sample basis. For exposure
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developed statistical models with the help of management
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determined to be individually impaired, we tested samples of
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experts and other historical data.
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loans and advances and examined management’s estimate of future cash flows, assessed their reasonableness and checked
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Considering the significance of the above matter to the standalone financial statements and since the matter required
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the resultant provision calculations;
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our significant attention to test the calculation of expected
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• Performed an overall assessment of the ECL provision
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credit losses, we have identified this as a key audit matter for
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levels at each stage, including management’s assessment
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current year audit.
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and provision on account of the Company’s portfolio, risk profile, credit risk management practices as well as the macroeconomic environment;
• Ensured compliance with RBI Master Circular on ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to advances’ (‘IRACP’) read with RBI circular on ‘Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances - Clarifications’ dated 12 November 2021, in relation to identification, upgradation and provisioning of nonperforming assets (NPAs); and
• Assessed the appropriateness and adequacy of the related presentation and disclosures in the accompanying financial statements in accordance with the applicable accounting standards and related RBI circulars and Resolution Framework.
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Key audit matters
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How our audit addressed the key audit matter
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Information Technology (“IT”) Systems and Controls for the financial reporting process
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The Company is highly dependent on its Information Technology
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Our key audit procedures with the involvement of our IT
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(“IT”) systems for carrying on its operations which require large
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specialists included, but were not limited to the following:
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volume of transactions to be processed in numerous locations
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• Obtained an understanding of the Company’s IT related
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on a daily basis. Among other things, management also uses
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control environment and conducted risk assessment and
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the information produced by the IT systems for accounting and
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identified IT applications, data bases and operating systems
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preparation and presentation of the financial statements.
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that are relevant to our audit.
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The Company’s accounting and financial reporting processes
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• Tested the design and operating effectiveness of the
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are dependent on automated controls enabled by IT systems
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Company’s IT controls over the IT applications as identified
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which impacts key financial accounting and reporting items such as loans, interest income, EIR computation, impairment on
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above;
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loans, computation of daily DPD, assignment of loans amongst
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• On such in-scope IT systems, we have tested key IT general
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others. The controls implemented by the Company in its IT
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controls with respect to the following domains:
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environment determine the integrity, accuracy, completeness
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a. Program change management which includes controls
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and validity of data that is processed by the applications and is
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on moving program changes to production environment
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ultimately used for financial reporting.
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as per defined procedures and relevant segregation of
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Our areas of audit focus included user access management,
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environments
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changes to the IT environment and segregation of duties
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b. User access management which includes user access
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Further, we focused on key automated controls relevant for
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provisioning, de-provisioning, access review, password
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financial accounting and reporting systems.
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management, sensitive access rights and segregation of
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Accordingly, since our audit strategy included focus on key IT
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duties
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systems and controls due to pervasive impact on the financial
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c. Other areas that were assessed under the IT control
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statements, we have determined the ‘IT Systems and Controls for the financial reporting process’ as a key audit matter for
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environment included batch processing and interfaces.
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current year audit.
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• Evaluated the design and tested the operating effectiveness of key automated controls within various business processes. This included testing of configuration and other application layer controls identified during our audit and report logic for system generated reports relevant to the audit mainly for loans, interest income and impairment of loan assets for evaluating completeness and accuracy.
• Where deficiencies were identified, tested compensating controls or performed alternative procedures.
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Information other than the Financial Statements and Auditor’s Report thereon
6. The Company’s Board of Directors are responsible for the other information. The other information comprises the information included in the Director’s report, but does not include the standalone financial statements and our auditor’s report thereon.
Our opinion on the standalone financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the standalone financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that 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 Those Charged with Governance for the Standalone Financial Statements
7. The accompanying standalone financial statements have been approved by the Company’s Board of Directors. The Company’s Board of Directors are responsible for the matters stated in section 134(5) of the Act with respect to the preparation and presentation of these standalone financial statements that give a true and fair view of the financial position, financial performance including other comprehensive income, changes in equity and cash flows of the Company in accordance with the Ind AS specified under section 133 of the Act and other accounting principles generally accepted in India. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company 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.
8. In preparing the financial statements, the Board of Directors are responsible for assessing the Company’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 the Board of Directors either intend to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
9. Those Board of Directors are also responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Standalone Financial Statements
10. 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 Standards on Auditing 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.
11. As part of an audit in accordance with Standards on Auditing, specified under section 143(10) of the Act 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;
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. Under section 143(3) (i) of the Act we are also responsible for expressing our opinion on whether the Company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;
• Conclude on the appropriateness of Board of Directors’ 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 Company’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 Company to cease to continue as a going concern; and
• 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.
12. 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.
13. 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.
14. 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.
Report on Other Legal and Regulatory Requirements
15. As required by section 197(16) of the Act based on our audit, we report that the Company has paid remuneration to its directors during the year in accordance with the provisions of and limits laid down under section 197 read with Schedule V to the Act.
16. As required by the Companies (Auditor’s Report) Order, 2020 (‘the Order’) issued by the Central Government of India in terms of section 143(11) of the Act we give in the Annexure A a statement on the matters specified in paragraphs 3 and 4 of the Order, to the extent applicable.
17. Further to our comments in Annexure A, as required by section 143(3) of the Act based on our audit, we report, to the extent applicable, that:
a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit of the accompanying standalone financial statements;
b) in our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books;
c) The standalone financial statements dealt with by this report are in agreement with the books of account
d) In our opinion, the aforesaid standalone financial statements comply with Ind AS specified under section 133 of the Act;
e) On the basis of the written representations received from the directors and taken on record by the Board of Directors, none of the directors is disqualified as on 31 March 2023 from being appointed as a director in terms of section 164(2) of the Act;
f) With respect to the adequacy of the internal financial controls with reference to financial statements of the Company as on 31 March 2023 and the operating effectiveness of such controls, refer to our separate Report in Annexure B wherein we have expressed an unmodified opinion; and
g) With respect to the other matters to be included in the Auditor’s Report in accordance with rule 11 of the Companies (Audit and Auditors) Rules, 2014 (as amended), in our opinion and to the best of our information and according to the explanations given to us
i. the Company, as detailed in note 36 to the standalone financial statements, has disclosed the impact of pending litigations on its financial position as at 31 March 2023;
ii. the Company did not have any long-term contracts including derivative contracts for which there were any material foreseeable losses as at 31 March 2023;
iii. There were no amounts which were required to be transferred to the Investor Education and Protection Fund by the Company during the year ended 31 March 2023;
iv. a. The management has represented that, to the
best of its knowledge and belief, as disclosed in note 48.13 to the standalone financial statements, no funds have been advanced or loaned or invested (either from borrowed funds or securities premium or any other sources or kind of funds) by the Company to or in any person(s) or entity(ies), including foreign entities (‘the intermediaries’), with the understanding, whether recorded in writing or otherwise, that the intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of
the Company (‘the Ultimate Beneficiaries’) or provide any guarantee, security or the like on behalf the Ultimate Beneficiaries;
b. The management has represented that, to the best of its knowledge and belief, as disclosed in note 48.13 to the standalone financial statements, no funds have been received by the Company from any person(s) or entity(ies), including foreign entities (‘the Funding Parties’), with the understanding, whether recorded in writing or otherwise, that the Company shall, whether directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (‘Ultimate Beneficiaries’) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
c. Based on such audit procedures performed as considered reasonable and appropriate in the circumstances, nothing has come to our notice that has caused us to believe that the management representations under sub-clauses (a) and (b) above contain any material misstatement.
v. The Company has not declared or paid any dividend during the year ended 31 March 2023.
vi. Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires all companies which use accounting software for maintaining their books of account, to use such an accounting software which has a feature of audit trail, with effect from the financial year beginning on 1 April 2023 and accordingly, reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 (as amended) is not applicable for the current financial year.
For Walker Chandiok & Co LLP
Chartered Accountants
Firm’s Registration No.: 001076N/N500013
Manish Gujral
Partner
Membership No.: 105117
UDIN: 23105117BGRNME3528
Place: Mumbai
Date: 03 May 2023
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