To the Members of The Karnataka Bank Limited
Report on audit of the Standalone Financial Statements
1.01 We have audited the standalone financial statements of The Karnataka Bank Limited('the Bank1) which comprise the Balance Sheet as at 31st March2021 the Profit and Loss Account and the Cash Flow Statement for the year then ended andnotes to the financial statements including a summary of the significant accountingpolicies and other explanatory information. Incorporated in these financial statements arethe returns for the year ended on that date of 132 Branches/Offices audited by us and 762Branches/ Offices audited by the Statutory Branch Auditors.
1.02 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 in the manner so required for the Banking Companies and are in conformity with theaccounting principles generally accepted in India and give a true and fair view of thestate of affairs of the Bank as at 31st March 2021 and its Profit and CashFlows for the year ended on that date.
Basis for Opinion
2.01 We conducted our audit in accordance with the Standards on Auditing (SAs)specified under section 143(10) of the Companies Act 2013. Our responsibilities underthose Standards are further described in the Auditor's Responsibilities for the Audit ofthe Financial Statements section of our report. We are independent of the Bank inaccordance with the Code of Ethics issued by the Institute of Chartered Accountants ofIndia together with the ethical requirements that are relevant to our audit of thefinancial statements under the provisions of the Companies Act 2013 and the 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.
Emphasis of Matter
3.01 We draw attention to Schedule 18 - Note A.10 (b) of the accompanying financialstatements which describes the uncertainties due to outbreak of novel coronavirus (COVID19). In view of these uncertainties the impact on the Bank's financial statements issignificantly dependent on future developments.
3.02 Our opinion is not modified in respect of this matter.
Key Audit Matters
4.01 Key audit matters are those matters that in our professional judgement were ofmost significance in our audit of the financial statements of the current period. Thesematters were addressed in the context of our audit of the financial statements as a wholeand in forming our opinion thereon and we do not provide a separate opinion on thesematters.
|Key Audit Matters ||How our audit addressed the Key Audit Matters |
|Identification of Non Performing Assets Income Recognition and Adequacy of Provisions || |
|Loans and Advances and Investments are classified as performing and non performing assets in accordance with the prudential norms issued by the Reserve Bank of India. ||We have assessed the Bank's systems in place for classification of the assets identification and provision for the non performing assets including assessment of realizable securities and their valuations. Our audit approach consisted of testing the design of the systems for identification of the non performing assets to ensure conformity with the guidelines of the Reserve Bank of India in the matter and test checking the identification and valuation of non performing assets. |
|The identification of non performing assets and creation of provision on such assets involves key management judgements relating to performance determination of realizable securities available to the Bank and their valuation. ||We have reviewed the Branch audit reports and ensured that changes suggested by the Branch Auditors' were duly carried out wherever necessary. |
|In the event of any improper application of the prudential norms or consideration of the incorrect value of the security the carrying value of the assets could be materially misstated either individually or collectively and in view of the significance of the amount of advances and investments in the financial statements the classification of the advances and investments and provisioning thereon has been considered as Key Audit Matter in our audit. ||Further we have reviewed on a test check basis the reports of the credit inspection risk based internal concurrent audits and other special reports to ascertain the advances having any adverse features/ comments and reviewed the MIS and reports generated from the Bank's system for the same. |
|Due to the Covid pandemic and its consequential effect on the Bank we have also identified implementation of the Covid Regulatory Package and the Hon. Supreme Court judgement on this matter as a Key Audit Matter. ||With respect to those borrowers to whom moratorium was granted in accordance with the Regulatory Package on a sample basis we tested that the moratorium was granted in accordance with the Board approved policy. |
| ||With respect to asset classification and income recognition on a sample basis we tested that such asset classification and income recognition was carried out in accordance with the guidelines of the Hon'ble Supreme Court and Reserve Bankof India. |
| ||Modified Audit Procedures were carried out wherever physical inspection of documents and records could not be carried due to the Pandemic by remote access and digitally scanned documents and discussions over email/telephone and video conference and other electronic modes. |
|Information Technology ("IT") Systems and Controls || |
|The IT environment of the Bank is complex and involves a large number of independent and inter dependent IT systems used in the operations of the Bank for processing and recording large volume of transactions at numerous locations. ||We evaluated and understood the IT system adopted by the Bank for its Core Banking and other operations. |
|Appropriate IT general controls and application controls are required to ensure that such IT systems are able to process the data as required completely accurately and consistently for reliable financial reporting. ||We assessed the operative effectiveness of key automated controls within various business processes. This includes testing the integrity of system interfaces completeness and accuracy of the data system reconciliation controls and automated calculations. |
|We have identified 'IT Systems and Controls' as key audit matter because of the high level automation significant number of systems being used by the management and the complexity of the IT architecture and its impact on the financial reporting system. ||We assessed the system of data feeding and extraction of the financial information and statements from the IT system existing in the Bank reviewed the output and reports generated by the system on a sample basis and where deficiencies were observed/identified tested the compensating controls and alternate procedures. |
|Recognition of Deferred Tax Assets || |
|Deferred Income Tax reflects the impact of timing difference between the taxable income and accounting income. Deferred Tax Asset is not recognized unless there is a virtual certainty that sufficient future taxable income will be available against which such asset will be realized. ||We have relied upon the management estimates and expert opinions taken by the Bank regarding eligibility of carried forward tax losses for set off against future taxable income and used our own internal expertise in evaluating the claims assumptions and profitability forecasts and assertions of the management provided to us that sufficient future taxable income will be available for set off against the tax losses carried forward. |
|Contingent Liabilities tax litigations and claims || |
|Contingent liability is a possible obligation outcome of which is contingent upon occurrence or non occurrence of one or more uncertain future events. In the judgement of the management such claims and litigations including tax demands against the Bank would not eventually lead to a liability. Flowever should there be an adverse outcome the Bankwill be liable to pay the disputed amount with interest/ penalty as may be decided by the competent authorities the impact of which is uncertain/unascertainable at this stage. ||We have relied upon the management note/estimates and the expert/legal opinions obtained by the Bank regarding the claims and tax litigations and reviewed internally the nature of such litigations and claims their sustainability and likelihood of the claims/litigations materializing into eventual liability upon final resolution from the available records and developments to date. |
Information Other than the Standalone Financial Statements and Auditors' Report Thereon
5.01 The Bank's Board of Directors' are responsible for the other information. Theother information comprises the information included in the Annual Report including Pillar3 Disclosure under the New Capital Adequacy Framework (Basel III disclosures) but doesnot include the standalone financial statements and the Auditors' report thereon. TheAnnual Report is expected to be made available to us after the date of this Auditors'report.
5.02 Our opinion on the standalone financial statements does not cover the otherinformation and we will not express any form of assurance conclusion thereon.
5.03 In connection with our audit of the standalone financial statements ourresponsibility is to read the other information identified above when it becomes availableand in doing so consider whether the other information is materially inconsistent withthe standalone financial statements or our knowledge obtained in the audit or otherwiseappears to be materially misstated.
5.04 When we read the Annual Report if we conclude that there is a materialmisstatement therein we are required to communicate the matter to those charged withgovernance.
Responsibilities of the Management and those charged with Governance for the StandaloneFinancial Statements
6.01 The Bank's Board of Directors' is responsible for the matters stated in Section134(5) of the Companies Act 2013 ('the Act') with respect to the preparation of thesestandalone financial statements that give a true and fair view of the financial positionfinancial performance and cash flows of the Bank in accordance with the accountingprinciples generally accepted in India including the Accounting Standards specified underSection 133 of the Act and provisions of Section 29 of the Banking Regulation Act 1949and circulars and guidelines issued by the Reserve Bank of India ('RBIO from time to time.This responsibility also includes maintenance of adequate accounting records in accordancewith the provisions of the Act for safeguarding of the assets of the Bank and forpreventing and detectingfraudsand other irregularities; selection and application ofappropriate accounting policies; making judgements and estimates that are reasonable andprudent; and design implementation and maintenance of adequate internal financialcontrols that were operating effectively for ensuring the accuracy and completeness ofthe accounting records relevant to the preparation and presentation of the financialstatements that give a true and fair view and are free from material misstatement whetherdue to fraud or error.
6.02 In preparing thefinancial statementsthe management is responsible for assessingthe Bank's ability to continue as a going concern disclosing as applicable mattersrelated to going concern and using the going concern basis of accounting unless themanagement either intends to liquidate the Bank or to cease operations or has norealistic alternative but to do so.
Auditors'Responsibilitiesfor the audit of the Standalone Financial Statements
7.01 Our objectives are to obtain reasonable assurance about whether the financialstatements as a whole are free from material misstatement whether due to fraud or errorand to issue an Auditors' report that includes our opinion. Reasonable assurance is a highlevel of assurance but is not a guarantee that an audit conducted in accordance with theSAs will always detect a material misstatement when it exists. Misstatements can arisefrom fraud or error and are considered material if individually or in the aggregate theycould reasonably be expected to influence the economic decisions of users' taken on thebasis of these financial statements.
7.02 As part of an audit in accordance with the SAs we exercise professional judgementand maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financialstatements whether due to fraud or error design and perform audit procedures responsiveto those risks and obtain audit evidence that is sufficient and appropriate to provide abasis for our opinion. The risk of not detecting a material misstatement resulting fromfraud is higher than for one resulting from error as fraud may involve collusionforgery intentional omissions misrepresentations or the override of internal control;
Obtain an understanding of the internal control relevant to the audit in orderto design audit procedures that are appropriate in the circumstances. Under section143(3)(i) of the Companies Act 2013 we are also responsible for expressing our opinionon whether the Bank has adequate internal financial controls system in place and theoperating effectiveness of such controls;
Evaluate the appropriateness of accounting policies used and the reasonablenessof accounting estimates and related disclosures made by the management;
Conclude on the appropriateness of management's use of the going concern basisof accounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Bank'sability to continue as a going concern. If we conclude that a material uncertainty existswe are required to draw attention in our Auditors' report to the related disclosures inthe 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 Auditreport. However future events or conditions may cause the Bank to cease to continue as agoing concern; and
Evaluate the overall presentation structure and content ofthefinancialstatements including the disclosuresand whetherthefinancial statements represent theunderlying transactions and events in a manner that achieves fair presentation.
7.03 We communicate with those charged with governance regarding among other mattersthe planned scope and timing of the audit and significant audit findings includinganysignificantdeficienciesin internal control that we identify during our audit.
7.04 We also provide those charged with governance with a statement that we havecomplied with the relevant ethical requirements regarding independence and to communicatewith them all relationships and other matters that may reasonably be thought to bear onour independence and where applicable related safeguards.
7.05 From the matters communicated with those charged with governance we determinethose matters that were of most significance in the audit of the financial statements ofthe current period and are therefore the key audit matters. We describe these matters inour Audit report unless law or regulation precludes public disclosure about the matter orwhen in extremely rare circumstances we determine that a matter should not becommunicated in our report because the adverse consequences of doing so would reasonablybe expected to outweigh the public interest benefits of such communication.
8.01 We did not audit the financial statements/information of 762 Branches/Officesincluded in the standalone financial statements of the Bank whose financialstatements/financial information reflect total advances of Rs. 30155.28 crore as at 31stMarch 2021 and total revenue of Rs. 3307.99 crore for the year ended on that date asconsidered in the standalone financial statements. The financial statements/information ofthese Branches have been audited by the Branch Auditors' whose reports have been furnishedto us and our opinion in so far as it relates to the amounts and disclosures pertainingto such Branches is based solely on the report of the Branch Auditors'.
8.02 Our opinion is not modified in respect of this matter.
Report on Other Legal and Regulatory Requirements
9.01 The Balance Sheet and the Profit and Loss Account have been drawn up in accordancewith the provisions of Section 29 of the Banking Regulation Act 1949 and Section 133 ofthe Companies Act 2013 read with Rule 7 of the Companies (Accounts) Rules 2014.
9.02 As required by sub section (3) of Section 30 of the Banking Regulation Act 1949we report that:
(a) we have obtained all the information and explanations whichto the best of ourknowledge and belief were necessary for the purpose of our audit and have found them tobe satisfactory;
(b) the transactions of the Bank which have come to our notice have been within thepowers of the Bank;
(c) the returns received from the offices; and Branches of the Bank have been foundadequate for the purposes of our audit.
9.03 Further as required by Section 143(3) of the Act we report that:
(a) we have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purpose of our audit;
(b) in our opinion proper books of account as required by law have been kept by theBank so far as it appears from our examination of those books and proper returns adequatefor the purposes of our audit have been received from Branches/Offices not visited by us;
(c) the reports on the accounts of the Branch/ Offices of the Bank audited undersection 143(8) of the Act by the Statutory Branch Auditors' of the Bank have been sent tous and have been properly dealt with by us in preparing this report:
(d) the Balance Sheet the Profit and Loss Account and the Cash Flow Statement dealtwith by this report are in agreement with the books of account;
(e) in our opinion the aforesaid standalone financial statements comply with theAccounting Standards specified under Section 133 of the Act read with Rule 7 of theCompanies (Accounts) Rules 2014 to the extent they are not inconsistent with theaccounting policies prescribed by the Reserve Bank of India;
(f) on the basis of written representations received from the Directors as on 31stMarch 2021 and taken on record by the Board of Directors none of the Director isdisqualified as on 31st March 2021 from being appointed as a Director in termsof Section 164(2) of the Act;
(g) With respect to the matter to be included in the Auditors' Report under section197(16) as informed to us requirements with respect to the matter to be included in theAuditor's Report under section 197(16) of the Act are not applicable to the Bankingcompanies.
(h) with respect to the adequacy of the internal financial controls over financialreporting of the Bank and the operating effectiveness of such controls separate Report in"Annexure A" may please be referred;
(i) with respect to other matters to be included in the Auditors' Report in accordancewith Rule 11 of the Companies (Audit and Auditors') Rules 2014 in our opinion and to thebest of our information and according to the explanations given to us:
(i) the Bank has disclosed the impact of pending litigations on its financial positionin its financial statements - Refer Schedule 18 Notes C. 21 to the financial statements;
(ii) the Bank does not have any long-term contracts including derivative contracts forwhich there were any material foreseeable losses; and
(iii) there has been no delay in transferring the amounts required to be transferred tothe Investor Education and Protection Fund by the Bank.
Annexure A to the Independent Auditors' Report of even date on the standalone financialstatements of The Karnataka Bank Limited
Report on the Internal Financial Controls Over Financial
Reporting under Clause (i) of sub section 3 of Section 143 of the Companies Act 2013
1.01 We have audited the internal financial controls over financial reporting of TheKarnataka Bank Limited ('the Bank") as at 31st March 2021 in conjunctionwith our audit of the standalone financial statements of the Bank for the year ended onthat date.
Management's Responsibility for Internal Financial Controls Over Financial Reporting
2.01 The Bank's Board of Directors' is responsible for establishing and maintaininginternal financial controls based on the internal control over financial reportingcriteria established by the Bank considering the essential components of internal controlstated in the Guidance Note on Audit of Internal Financial Controls Over FinancialReporting ('the Guidance Note') issued by the Institute of Chartered Accountants of India('the ICAIO.
2.02 These responsibilities include the design implementation and maintenance ofadequate internal financial controls that were operating effectively for ensuring theorderly and efficient conduct of its business including adherence to Bank's policies thesafeguarding of its assets the prevention and detection of frauds and errors theaccuracy and completeness of the accounting records and the timely preparation ofreliable financial information as required under the Companies Act 2013 ('the Act').
3.01 Our responsibility is to express an opinion on the Bank's internal financialcontrols over financial reporting based on our audit. We conducted our audit in accordancewith the Guidance Note on Audit of Internal Financial Controls over Financial Reporting('the Guidance Note') and the Standards on Auditing ('the Standards') both issued by theICAI and deemed to be prescribed under section 143(10) of the Act to the extentapplicable to an audit of internal financial controls. Those Standards and the GuidanceNote require that we comply with the ethical requirements and plan and perform the auditto obtain reasonable assurance about whether adequate internal financial controls overfinancial reporting was established and maintained and if such controls operatedeffectively in all material respects.
3.02 Our audit involves performing procedures to obtain audit evidence about theadequacy of the internal financial controls system over financial reporting and theiroperating effectiveness. Our audit of internal financial controls over financial reportingincluded obtaining an understanding of internal financial controls over financialreporting assessing the risk that a material weakness exists and testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk. Theprocedures selected depend on the Auditors' judgement including the assessment of therisks of material misstatement of the financial statements whether due to fraud or error.
3.03 We believe that the audit evidence we have obtained is sufficient and appropriateto provide a basis for our audit opinion on the Bank's internal financial controls systemover financial reporting.
Meaning of Internal Financial Controls Over Financial Reporting
4.01 A Bank's internal financial control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reporting and thepreparation offinancial statements for externa purposes in accordance with the generallyaccepted accounting principles. A Bank's internal financial control over financialreporting includes those policies and procedures that:
a) pertain to the maintenance of records that in reasonable detail accurately andfairly reflect the transactions and dispositions of the assets of the Bank;
b) provide reasonable assurance that the transactions are recorded as necessary topermit preparation of the financial statements in accordance with the generally acceptedaccounting principles and that receipts and expenditure of the Bank are being made onlyin accordance with authorizations of management and Directors' of the Bank; and
c) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition use or disposition of the Bank's assets that could have amaterial effect on the financial statements.
Inherent Limitations of Internal Financial Controls Over Financial Reporting
5.01 Because of the inherent limitations of internal financial controls over financialreporting including the possibility of collusion or improper management override ofcontrols material misstatements due to error or fraud may occur and not be detected.Also projections of any evaluation of the internal financial controls over financialreporting to future periods are subject to the risk that the internal financial controlover financial reporting may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.
6.01 In our opinion the Bank has in all material respects an adequate internalfinancial controls system over financial reporting and such internal financial controlsover financial reporting were operating effectively as at 31st March 2021based on the internal control over financial reporting criteria established by the Bankconsidering the essential components of internal control stated in the Guidance Noteissued by the ICAI.
|for Manohar Chowdhry & Associates ||for Badari Madhusudhan & Srinivasan |
|Chartered Accountants ||Chartered Accountants |
|FR No. 001997S ||FR No. 005389S |
|Sd/- ||Sd/- |
|(Murali Mohan Bhat) ||(S. Rajendiran) |
|Partner ||Partner |
|M. No. 203592 ||M. No. 021883 |
|UDIN: 21203592AAAACJ3515 ||UDIN: 21021883AAAAAC8729 |
|Place: Mangalore || |
|Date: 26.05.2021 || |