Aavas Financiers Limited
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 2024, 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 material accounting policy information 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 2024, and its profit (including other comprehensive income), its cash flows and the changes in equity for the year ended on that date.
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 Matter
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 year. 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.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing specified under section 143(10)
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Key audit matter
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How our audit addressed the key audit matter
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At 31 March 2024, the Company reported total gross loans of T1,408,919 lakh (2023: T1,154,788 lakh) and T8,482 lakh of expected credit loss provisions (2023: T7,161 lakh).
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Refer note 1 for material accounting policies and notes 4 and 28 for financial disclosures in the accompanying standalone financial statements.
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.
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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:
Ý 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 restructuring of loans approved by the Board of Directors pursuant to the RBI circulars/ guidelines in earlier years and ensured classification of such Loans is in compliant with the requirements of the RBI circulars / guidelines;
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Key audit matter
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How our audit addressed the key audit matter
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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 restructuring.
The expected credit loss is calculated using the percentage of probability of default (PD), loss given default (LGD) and exposure at default (EAD) for each of the stages of loan portfolio. Additional management overlay is estimated considering non prediction and long-term future impact. The Expected Credit Loss (“ECL”) is measured at 12-month ECL for Stage 1 loan assets and at lifetime ECL for Stage 2 and Stage 3 loan assets. Significant management judgment and assumptions involved in measuring ECL is required with respect to:
Ý Segmentation of loan book in buckets
Ý Determining the criteria for a significant increase in credit risk
Ý Factoring in future economic assumptions
Ý Techniques used to determine probability of default, loss given default and exposure at default
These parameters are derived from the Company’s internally developed statistical models with the help of management experts and other historical data. Considering the significance of the above matter to the standalone financial statements and since the matter required our significant attention to test the calculation of expected credit losses, we have identified this as a key audit matter for current year audit.
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Ý Performed a walkthrough of the impairment loss allowance process, and assessed the design and tested operating effectiveness of the key controls over completeness and accuracy of the key inputs (including loan book as at 31 March 2024) and assumptions considered for calculation, recording and monitoring of the impairment loss recognized;
Ý Tested the completeness of loans and advances included in the Expected Credit Loss calculations as of 31 March 2024 by reconciling it with the balance as per loan balance register. We tested the data used in the PD and LGD model for ECL 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 were allocated to the appropriate stage;
Ý Obtained an understanding of the modelling techniques adopted by the Company including the key inputs and assumptions;
Ý Tested the appropriateness of determining Exposure at Default (EAD), PD and LGD, on sample basis. For exposure determined to be individually impaired, we tested samples of loans and advances and examined management’s estimate of future cash flows, assessed their reasonableness and checked the resultant provision calculations;
Ý Performed an overall assessment of the ECL provision levels at each stage, including management’s assessment and provision on account of the Company’s portfolio, risk profile, credit risk management practices as well as the macroeconomic environment;
Ý 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 / guidelines.
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Key audit matter
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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
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Our key audit procedures with the involvement of our IT
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Technology (“IT”) systems for carrying on its operations
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specialists included, but were not limited to the following:
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which require large volume of transactions to be processed
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Ý Obtained an understanding of the Company’s IT
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in numerous locations on a daily basis. Amongst other
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related control environment and conducted risk
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things, management also uses the information produced
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assessment and identified IT applications that are
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by the IT systems for accounting and preparation and presentation of the financial statements.
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relevant to our audit;
Ý On such in-scope IT systems, we have tested key IT
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The Company’s accounting and financial reporting processes are dependent on automated controls enabled
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general controls with respect to the following domains:
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by IT systems which impacts key financial accounting and
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a. User access management which includes user
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reporting items such as loans, interest income, impairment
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access provisioning, de-provisioning, access
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on loans, computation of daily DPD, assignment of
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review, password management, sensitive access
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loans amongst others. The controls implemented by the
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rights and segregation of duties to ensure that
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Company in its IT environment determine the integrity,
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privilege access to applications, operating system
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accuracy, completeness and validity of data that is
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and databases in the production environment
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processed by the applications and is ultimately used for
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were granted only to authorized personnel;
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financial reporting.
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b. Program change management which includes
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Our areas of audit focus included user access management,
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controls on moving program changes to production
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changes to the IT environment and segregation of duties
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environment as per defined procedures and
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Further, we focused on key automated controls relevant
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relevant segregation of environments; and
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for financial accounting and reporting systems.
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c. Other areas that were assessed under the IT
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Implementation of IT systems during the year
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control environment included batch processing and interfaces;
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The Company has implemented a new IT system
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“Salesforce” w.e.f. 1 April 2023 for end to end loan
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Ý Evaluated the design and tested the operating
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origination process starting from application of a loan to
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effectiveness of key automated controls within
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completion of credit assessment before disbursements are
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various business processes. This included testing of
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initiated.
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configuration and other application layer controls identified during our audit and report logic for system
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Migration of IT systems during the year
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generated reports relevant to the audit mainly for
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During the year, the Company has migrated to a new IT
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loans, interest income and impairment of loan assets
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system “Oracle Fusion” w.e.f. from 1 September 2023 for accounting of certain financial statements line items
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for evaluating completeness and accuracy. .
Ý Where deficiencies were identified, tested
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and overall preparation and presentation of the financial statements and continues to use its existing accounting
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compensating controls or performed alternative procedures.
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system “Omnifin” for the remaining financial statement
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line items.
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Apart from above, below procedures were performed in
relation to migration of IT systems which included:
Ý Obtained an understanding of the migration process and evaluated the controls established by the Company for such migration activity;
Ý Verified general ledger wise balance transfer, vendor wise balance transfer, system access controls reconciliations, etc to ensure accuracy and completeness of transfer of data between the systems; and
Ý Read the certificate obtained by the management to ensure completeness of movement of balances to the new IT system.
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8. In preparing the financial statements, the Board of Directors is 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 intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
9. The Board of Directors is 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:
Ý 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;
Ý 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;
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.
Ý Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;
Ý 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
Ý 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 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 2024 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 2024 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 37 and 38(b) to the standalone financial statements, has disclosed the impact of pending litigations on its financial position as at 31 March 2024;
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 2024;
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 2024;
iv. a. The management has represented that,
to the best of its knowledge and belief, as disclosed in note 49.13(a) 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 49.13(b) 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 2024.
vi. Based on our examination which included test checks, the Company, in respect of financial year commencing on 1 April 2023, has used an accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all relevant transactions recorded in the software. Further, during the course of our audit we did not come across any instance of audit trail feature being tampered with.
For Walker Chandiok & Co LLP
Chartered Accountants Firm’s Registration No.: 001076N/N500013
Manish Gujral
Partner
Membership No.: 105117 UDIN: 24105117BKDANC9004
Place: Mumbai Date: 25 April 2024
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