To the Members of Axis Bank Limited
Report on the Audit of the Standalone Financial Statements
We have audited the accompanying standalone financial statements ofAxis Bank Limited ("the Bank") which comprise the Balance Sheet as at March312019 the Profit and Loss Account and the Cash Flow Statement for the year then endedand notes to the standalone financial statements including a summary of significantaccounting policies and other explanatory information.
In our opinion and to the best of our information and according to theexplanations given to us the aforesaid standalone financial statements give theinformation required by the Banking Regulation Act 1949 as well as the Companies Act2013 ("the Act") in the manner so required for banking companies and give a trueand fair view in conformity with the accounting principles generally accepted in India ofthe state of affairs of the Bank as at March 312019 its profit and its cash flows forthe year ended on that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs)specified under section 143(10) of the Act. Our responsibilities under those Standards arefurther described in the Auditor's Responsibilities for the Audit of the standalonefinancial statements section of our report. We are independent of the Bank in accordancewith the Code of Ethics issued by the Institute of Chartered Accountants of India("ICAI") together with the ethical requirements that are relevant to our auditof the standalone financial statements under the provisions of the Act and Rulesthereunder and we have fulfilled our other ethical responsibilities in accordance withthese requirements and the Code of Ethics. We believe that the audit evidence we haveobtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that in our professional judgmentwere of most significance in our audit of the standalone financial statements of thecurrent period. These matters were addressed in the context of our audit of the standalonefinancial statements as a whole and in forming our opinion thereon and we do not providea separate opinion on these matters. We have determined the matters described below to bethe key audit matters to be communicated in our report.
|Key Audit Matter ||Procedure performed |
|IT Controls Framework || |
|Axis Bank has a complex IT architecture to support its day to day business operations. The volume of transactions processed and recorded is huge. Moreover a transaction may be required to be recorded across multiple applications depending upon the process. Each application has different rules incorporated in it and a different set of user access and authority matrix. These applications are interlinked using different technologies. Data transfer happens in real time or at a particular time of the day; in batches or at a transaction level and in an automated manner or manually. The Core Banking Solution (CBS) itself has many interfaces. All these data streams directly affect financial reporting. ||IT audit specialists are an integral part of our engagement team. Our approach of testing IT General Controls (ITGC) and IT Application Controls (ITAC) is risk based and business centric. As a part of our IT controls testing we have tested ITGC as well as ITAC. The focus of testing of ITGCs was based on the various parameters such as Completeness Validity Identification Authentication Authorization Integrity and Accountability. On the other hand focus of testing automated controls from applications was whether the controls prevent or detect unauthorized transactions and support financial objectives including completeness accuracy authorization and validity of transactions. |
| ||We gathered a comprehensive understanding of IT applications landscape implemented at the Bank. It was followed by process understanding mapping of applications to the same and understanding financial risks posed by people-process and technology. |
|The Bank has a process for identifying the applications where the controls are embedded. It also has a process to ensure that systems processes and controls remain relevant. The Bank's IT control framework includes automated semi-automated and manual controls designed to address identified risks. IT controls are stated in Entity Level Controls (ELC) IT General Controls (ITGC) and IT Application Controls (ITAC). ||In ITGC testing we reviewed on sample basis control areas such as User Management Change Management Systems Security Incident Management Physical & Environmental Security Backup and Restoration Business Continuity and Disaster Recovery Service Level Agreement. |
| ||For ITAC we carried out on sample basis compliance tests of system functionality in order to assess the accuracy of system calculations. |
|We regard this area as a Key Audit Matter as the Bank's business is highly dependent on technology the IT environment is complex and the design and operating effectiveness of IT controls have a direct impact on a financial reporting process. Review of these controls allows us to provide assurance on the integrity and completeness of data processed through various IT applications which are used for the preparation of financial reports. ||We also carried out procedures such as validations and limit checks on data entered into applications approvals process dependencies and restriction on time period in which transactions may be recorded. |
| ||We tested the control environment using various techniques such as inquiry review of documentation/record/reports observation and re-performance. We also tested few controls using negative testing technique. We had taken adequate samples of instances for our tests. |
| ||Wherever deviations were noted either the same were explained to our satisfaction or we suitably modified our testing procedures to draw comfort. |
|Provisions and Write off of Advances || |
|The Bank's portfolio of advances to customers amounts to '49479797 Lacs as at March 31 2019 comprising of '23722782 Lacs towards its Corporate Customers ("Wholesale Banking" customers) and '25757015 Lacs towards its Retail Customers ("Retail Banking" customers). As required under Income Recognition Asset Classification and provisioning norms (IRAC norms) and other circulars notifications and directives issued by the Reserve Bank of India (RBI) the Bank classifies advances into performing and non-performing advances which consists of Standard Sub-standard Doubtful and Loss and makes appropriate provisions. ||Provisions for Corporate advances against specific individual loans (Wholesale Banking) 1. Testing the key controls over borrower risk grading for wholesale loans (larger customer exposures that are monitored individually) for classification of such loans as performing or non-performing advances. |
| || We tested on sample basis the approval of new lending facilities against the Bank's credit policies the performance of annual loan assessments and controls over the monitoring of credit quality. |
|The Bank on case to case basis as per it's governing framework identifies standard advances which require higher provision based on its evaluation of risk and internal ratings. The Bank also identifies sectors wherein the Bank perceives stress and makes higher provisions. Additionally the Bank also identifies accounts which are to be technical written off based on the framework approved by the Bank's Board of Directors. || We have assessed the process for classification by the management including identification of non-performing assets. |
| || We tested on sample basis loans to form our own assessment as to whether impairment events had occurred and to assess whether impairments had been identified in a timely manner. |
| || For the selected non-performing loans we assessed management's forecast and inputs of recoverable cash flows valuation of underlying security and collaterals estimates of recoverable amounts on default and other sources of repayment. |
|The provisions for such advances and technical write off is a Key Audit Matter as the Bank has significant credit risk exposure to a large number of borrowers across a wide range of borrowers products industries and geographies and there is a high degree of complexity and judgement involved in recoverability of advances estimating the provisions thereon and identification of accounts to be written off. ||This included testing controls over the identification of exposures showing signs of stress either due to internal factors specific to the borrower or external macroeconomic factors and testing the timeliness of and the accuracy of risk assessments and risk grading against the requirements of the Bank's lending policies and RBI IRAC norms. |
|The same resulted in significant audit effort to address the risks around loan recoverability and the determination of related provisions and write off. ||2. Performing credit assessments of a sample of corporate loans managed by a specialised group assessed as high risk or impaired focusing on larger exposures assessed by the Bank as showing signs of deterioration or in areas of emerging risk (assessed against external market conditions). We challenged the Bank's risk grading of the loan their assessment of loan recoverability and the impact on the credit provision. To do this we used the information on the Borrowers loan file discussed the case with the concerned officials and senior management and performed our own assessment of recoverability. |
| ||Provisions for Retail advances against specific individual loans (Retail Banking) |
| ||For retail loans (smaller customer exposures not monitored individually) testing controls over the systems which record lending arrears group exposures into delinquency buckets based on the number of days loans are overdue and calculate individual provisions. We tested automated calculation and change management controls and evaluated the Bank's oversight of the portfolios with a focus on controls over delinquency statistics monitoring. We tested on sample basis the level of provisions held against different loan products based on the delinquency profile and challenged assumptions made in respect of expected recoveries primarily from collateral held. We also carried out extensive data analytics procedures to identify exceptions and outliers. |
| ||Provisions estimated across loan portfolios (collective provision) |
| ||1. Testing the Bank's processes for making collective provision |
| ||2. Review of the Policy for higher provision for weak standard advances and stressed sectors adopted by the Bank |
| ||3. Validating the parameters used to calculate collective provisions with reference to IRAC norms and internal policy on higher provisions on weak standard advances; |
| ||4. Testing the completeness and accuracy of data transferred from underlying source systems used for computing collective provision; |
| ||5. Re-performing for a sample of retail and wholesale portfolios the calculation of collective provisions to determine the accuracy of the same. |
| ||Technical write off across loan portfolios |
| ||The Bank has adopted a framework for technical write off. We reviewed the framework and understood the process for identification of loan portfolios to be technically written off. We tested on sample basis the accounts identified during the year to be written off for compliance with the aforesaid framework. |
The Bank's Board of Directors is responsible for the other information.The other information comprises the information included in the Directors' Report formingpart of the Annual Report but does not include the standalone financial statementsconsolidated financial statements and our auditor's report thereon and the Pillar IIIDisclosures under the New Capital Adequacy Framework (Basel III disclosures). TheDirector's Report is expected to be made available to us after the date of this report.
Our opinion on the standalone financial statements does not cover theother information and the Basel III disclosures and accordingly we do not express anyform of assurance conclusion thereon.
In connection with our audit of the standalone financial statementsour responsibility is to read the other information and in doing so consider whether theother information is materially inconsistent with the standalone financial statements orour knowledge obtained in the audit or otherwise appears to be materially misstated.
When we read the Director's Report if we conclude that there is amaterial misstatement therein we are required to communicate the matter to those chargedwith governance.
Responsibilities of Management and Those Charged with Governance forthe Standalone Financial Statements
The Bank's Board of Directors is responsible for the matters stated insection 134(5) of the Act with respect to the preparation of these standalone financialstatements that give a true and fair view of the financial position financial performanceand cash flows of the Bank in accordance with the accounting principles generally acceptedin India including the Accounting Standards specified under section 133 of the Act readwith relevant rules issued thereunder provision of section 29 of the Banking RegulationAct 1949 and the circulars guidelines and directions issued by Reserve Bank of India("RBI") from time to time. This responsibility also includes maintenance ofadequate accounting records in accordance with the provisions of the Act for safeguardingof the assets of the Bank and for preventing and detecting frauds and otherirregularities; selection and application of appropriate accounting policies; makingjudgments and estimates that are reasonable and prudent; and design implementation andmaintenance of adequate internal financial controls that were operating effectively forensuring the accuracy and completeness of the accounting records relevant to thepreparation and presentation of the standalone financial statements that give a true andfair view and are free from material misstatement whether due to fraud or error.
In preparing the standalone financial statements management isresponsible for assessing the Bank's ability to continue as a going concern disclosingas applicable matters related to going concern and using the going concern basis ofaccounting unless management either intends to liquidate the Bank or to cease operationsor has no realistic alternative but to do so.
The Board of Directors are also responsible for overseeing the Bank'sfinancial reporting process.
Auditor's Responsibilities for the Audit of the Standalone FinancialStatements
Our objectives are to obtain reasonable assurance about whether thestandalone financial statements as a whole are free from material misstatement whetherdue 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 auditconducted in accordance with SAs will always detect a material misstatement when itexists. Misstatements can arise from fraud or error and are considered material ifindividually or in the aggregate they could reasonably be expected to influence theeconomic decisions of users taken on the basis of this standalone financial statements. Aspart of an audit in accordance with SAs we exercise professional judgment and maintainprofessional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of thestandalone financial statements whether due to fraud or error design and perform auditprocedures responsive to those risks and obtain audit evidence that is sufficient andappropriate to provide a basis for our opinion. The risk of not detecting a materialmisstatement resulting from fraud is higher than for one resulting from error as fraudmay involve collusion forgery intentional omissions misrepresentations or the overrideof internal control.
Obtain an understanding of internal control relevant to theaudit in order to design audit procedures that are appropriate in the circumstances. Undersection 143(3)(i) of the Act we are also responsible for expressing our opinion onwhether the Bank has adequate internal financial controls with reference to standalonefinancial statements in place and the operating effectiveness of such controls.
Evaluate the appropriateness of accounting policies used and thereasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the goingconcern basis of accounting and based on the audit evidence obtained whether a materialuncertainty exists related to events or conditions that may cast significant doubt on theBank's ability to continue as a going concern. If we conclude that a material uncertaintyexists we are required to draw attention in our auditor's report to the relateddisclosures in the standalone financial statements or if such disclosures are inadequateto modify our opinion. Our conclusions are based on the audit evidence obtained up to thedate of our auditor's report. However future events or conditions may cause the Bank tocease to continue as a going concern.
Evaluate the overall presentation structure and content of thestandalone financial statements including the disclosures and whether the standalonefinancial statements represent the underlying transactions and events in a manner thatachieves fair presentation.
We communicate with those charged with governance regarding amongother matters the planned scope and timing of the audit and significant audit findingsincluding any significant deficiencies in internal control that we identify during ouraudit.
We also provide those charged with governance with a statement that wehave complied with relevant ethical requirements regarding independence and tocommunicate with them all relationships and other matters that may reasonably be thoughtto bear on our independence and where applicable related safeguards.
From the matters communicated with those charged with governance wedetermine those matters that were of most significance in the audit of the standalonefinancial statements of the current period and are therefore the key audit matters. Wedescribe these matters in our auditor's report unless law or regulation precludes publicdisclosure about the matter or when in extremely rare circumstances we determine that amatter should not be communicated in our report because the adverse consequences of doingso would reasonably be expected to outweigh the public interest benefits of suchcommunication.
The standalone financial statements of the Bank for the previous yearended March 31 2018 were audited by another firm of Chartered Accountants who haveexpressed an unmodified opinion on those statements vide their report dated April 262018.
Report on Other Legal and Regulatory Requirements
(1) The Balance Sheet and the Profit and Loss Account have been drawnup in accordance with the provisions of section 29
of the Banking Regulation Act 1949 read with Section 133 of theCompanies Act 2013 read with relevant rules issued thereunder.
(2) As required under section 143 (3) of the Act and Section 30(3) ofthe Banking Regulation Act 1949 we report that:
a. We have sought and obtained all the information and explanationswhich to the best of our knowledge and belief were necessary for the purpose of ouraudit and have found them to be satisfactory;
b. In our opinion the transactions of the Bank which have come to ournotice have been within the powers of the Bank;
c. The financial accounting systems of the Bank are centralized andtherefore accounting returns for the purpose of preparing financial statements are notrequired to be submitted by the branches; we have visited 120 branches for the purpose ofour audit;
d. In our opinion proper books of account as required by law have beenkept by the Bank so far as it appears from our examination of those books;
e. The Balance Sheet the Profit and Loss Account and the Cash FlowStatement dealt with by this report are in agreement with the books of account;
f. In our opinion the aforesaid standalone financial statements complywith the Accounting Standards specified under section 133 of the Act read with relevantrules issued thereunder to the extent they are not inconsistent with the accountingpolicies prescribed by RBI;
g. On the basis of the written representations received from thedirectors as on March 31 2019 and taken on record by the Board of Directors none of thedirectors is disqualified as on March 31 2019 from being appointed as a director in termsof section 164(2) of the Act;
h. With respect to the adequacy of the internal financial controls withreference to financial statements of the Bank and the operating effectiveness of suchcontrols we give our separate report in "Annexure";
i. With respect to the other matters to be included in the Auditor'sReport in accordance with the requirements of section 197(16) of the Act as amended;
In our opinion and to the best of our information and according to theexplanations given to us requirements prescribed under section 197 of the Act is notapplicable by virtue of section 35B (2A) of the Banking Regulation Act 1949.
j. With respect to the other matters to be included in the Auditor'sReport in accordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 inour opinion and to the best of our information and according to the explanations given tous:
i. The Bank has disclosed the impact of pending litigations on itsfinancial position in its standalone financial statements - Refer Schedule 12 - ContingentLiabilities to the standalone financial statements;
ii. The Bank has made provision as required under the applicable lawor accounting standards for material foreseeable losses if any on long-term contractsincluding derivative contracts;
iii. There has been no delay in transferring amounts required to betransferred to the Investor Education and Protection Fund by the Bank.
For Haribhakti & Co. LLP Chartered Accountants
Firm Registration No.103523W / W100048
Purushottam Nyati Partner
Membership No. 118970
Place: Mumbai Date: April 25 2019
Annexure to the Independent Auditor's Report
[Referred to in paragraph 3 (h) under 'Report on Other Legal andRegulatory Requirements' in the Independent Auditor's Report of even date to the membersof Axis Bank Limited on the standalone Financial Statements for the year ended March312019]
Report on the Internal Financial Controls with reference to StandaloneFinancial Statements under clause (i) of subsection 3 of section 143 of the Companies Act2013 ("the Act")
We have audited the internal financial controls with reference toStandalone Financial Statements of Axis Bank Limited ("the Bank") as of March31 2019 in conjunction with our audit of the standalone Financial Statements of the Bankfor the year ended on that date.
Management's Responsibility for Internal Financial Controls
The Bank's management is responsible for establishing and maintaininginternal financial controls based on the internal control with reference to StandaloneFinancial Statements criteria established by the Bank considering the essential componentsof internal control stated in the Guidance Note on Audit of Internal Financial ControlsOver Financial Reporting (the "Guidance Note") issued by the Institute ofChartered Accountants of India ("ICAI"). These responsibilities include thedesign implementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the orderly and efficient conduct of its businessincluding adherence to Bank's policies the safeguarding of its assets the prevention anddetection of frauds and errors the accuracy and completeness of the accounting recordsand the timely preparation of reliable financial information as required under the Act.
Our responsibility is to express an opinion on the Bank's internalfinancial controls with reference to Standalone Financial Statements based on our audit.We conducted our audit in accordance with the Guidance Note and the Standards on Auditingspecified under section 143(10) of the Act to the extent applicable to an audit ofinternal financial controls both issued by the ICAI. Those Standards and the GuidanceNote require that we comply with ethical requirements and plan and perform the audit toobtain reasonable assurance about whether adequate internal financial controls withreference to Standalone Financial Statements was established and maintained and if suchcontrols operated effectively in all material respects.
Our audit involves performing procedures to obtain audit evidence aboutthe adequacy of the internal financial controls with reference to Standalone FinancialStatements and their operating effectiveness.
Our audit of internal financial controls with reference to StandaloneFinancial Statements included obtaining an understanding of internal financial controlswith reference to Standalone Financial Statements assessing the risk that a materialweakness exists and testing and evaluating the design and operating effectiveness ofinternal controls based on the assessed risk. The procedures selected depend on theauditor's judgement including the assessment of the risks of material misstatement of theStandalone Financial Statements whether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our audit opinion on the Bank's internal financialcontrols with reference to Standalone Financial Statements.
Meaning of Internal Financial Controls with reference to StandaloneFinancial Statements
A Bank's internal financial control with reference to StandaloneFinancial Statements is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of Standalone Financial Statementsfor external purposes in accordance with generally accepted accounting principles. ABank's internal financial control with reference to Standalone Financial Statementsincludes those policies and procedures that (1) pertain to the maintenance of recordsthat in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Bank; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of Standalone Financial Statements inaccordance
with generally accepted accounting principles and that receipts andexpenditures of the Bank are being made only in accordance with authorisations ofmanagement and directors of the Bank; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorised acquisition use or disposition of theBank's assets that could have a material effect on the Standalone Financial Statements.
Inherent Limitations of Internal Financial Controls with reference toStandalone Financial Statements
Because of the inherent limitations of internal financial controls withreference to Standalone Financial Statements including the possibility of collusion orimproper management override of controls material misstatements due to error or fraud mayoccur and not be detected. Also projections of any evaluation of the internal financialcontrols with reference to Standalone Financial Statements to future periods are subjectto the risk that the internal financial controls with reference to Standalone FinancialStatements may become inadequate because of changes in conditions or that the degree ofcompliance with the policies or procedures may deteriorate.
In our opinion the Bank has in all material respects an adequateinternal financial controls with reference to Standalone Financial Statements and suchinternal financial controls with reference to Standalone Financial Statements wereoperating effectively as at March 312019 based on the internal control with reference toStandalone Financial Statements criteria established by the Bank considering the essentialcomponents of internal controls stated in the Guidance Note issued by the ICAI.
For Haribhakti & Co. LLP
Firm Registration No.103523W/W100048
Purushottam Nyati Partner
Membership No. 118970
Place: Mumbai Date: April 25 2019