To The Members of
The Karnataka Bank Limited
Report on Audit of the Standalone Financial Statements Opinion
We have audited the accompanying Standalone Financial Statements of The
Karnataka Bank Limited ("the Bank"), which comprise the Balance sheet as at
March 31, 2023, the Profit and Loss Account, the Cash Flow Statement, and notes to the
Standalone Financial Statements, including a summary of significant and other explanatory
information.
In our opinion and to the best of our information and according to the
explanations given to us, the aforesaid Standalone Financial Statements give the
information required by the Banking Regulation Act, 1949 as well as the Companies Act,
2013, as amended ("the Act") in the manner so required for banking companies and
give a true and fair view in conformity with the accounting principles generally accepted
in India, of the state of affairs of the Bank as at March 31, 2023, its profit, its cash
flows for the year ended on that date.
Basis for Opinion
We conducted our audit of the Standalone Financial Statements in
accordance with the Standards on
Auditing (SAs) 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 Bank in accordance with
the Code of Ethics issued by the Institute of Chartered Accountants of India
(‘ICAI?) together with ethical requirements that are relevant to our audit of
the Standalone Financial Statements in accordance with the accounting principles generally
accepted in
India, including the Accounting Standards prescribed under section 133
of the Act read with the Companies (Accounting Standards) Rules, 2021, provisions of
section 29 of the Banking Regulation Act, 1949, circulars and guidelines issued by the
Reserve Bank of India ("RBI") from time to time, and we have fulfilled our other
ethical responsibilities in accordance with these requirements and the Code of Ethics. We
believe that the audit evidence sufficient appropriate to provide wehaveobtainedis a basis
for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment,
were of most significance in our audit of the Standalone Financial Statements for the
financial year ended March 31, 2023. These matters were addressed in the context of our
audit of the Standalone Financial Statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit
matters to be communicated in our report.
We have fulfilled the responsibilities described in the Auditor?s
responsibilities for the audit of the Standalone
Financial Statements section of our report, including in relation to
these matters. Accordingly, our audit included the performance of procedures designed to
respond to our assessment of the risks of material misstatement of the Standalone
Financial Statements. The results of our audit procedures, including the procedures
performed to address the matters below, provide the basis for our audit opinion on the
accompanying Standalone Financial Statements.
A. Identification of Non-Performing Assets (‘NPA?) and
Provisions thereon
Key Audit Matter
Significant estimates and judgment involved
Identification of Non-Performing Assets ("NPA") and
provisions in respect of NPAs are made based on management?s assessment in accordance
with the prudential norms issued by the Reserve Bank of
India on Income Recognition, Asset Classification and Provisioning
("IRACP") pertaining to Advances from time to time.
The provision on NPAs is based on the valuation of the security
available and also involves management estimates and judgements. In case of restructured
accounts, provision is made in accordance with the RBI guidelines.
Accordingly, our audit focused on identification of NPAs and provision
on advances as a key audit matter because of the level of management estimates and
judgment involved. Further, 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 amount of advances and investments in the financial given its
significance to the overall audit due to stakeholder and regulatory focus, the
classification of the advances and investments and provisioning thereon has been
considered as Key Audit Matter.
Auditors? Response
Our key audit approach included assessing the adequacy of design,
implementation and operating effectiveness of key internal controls and substantive audit
procedures over approval, recording and monitoring of loans, assessing the reliability of
documentation, measurement of provisions, identification of NPA accounts and valuation of
security for NPA accounts along with basis and rationale for various other management
information.
As a process, we have read the Bank?s policies for NPA
identification and provisioning and assessing compliancewiththeIRACPnorms. number of
systems being used
• We have evaluated details on a test check basis of exposures for
identification of NPA and calculation of provisions including valuation of primary and
collateral securities which involves certain degree of management estimation.
• We have evaluated and understood the
Bank?s internal control systems to ensure completeness, accuracy,
and relevance of data and to ensure that the same is in compliance with the RBI
guidelines, circulars and directions on the Prudential Norms on Income Recognition, Asset
Classification and
Provisioning issued from time to time.
• We tested on a samples basis to ensure completeness of
documentation, adherence of the approval process to the Bank?s Policy and board
minutes, credit review of customers, review of Special Mention Accounts (‘SMA?)
reports in the RBI?s Central Repository of Information on Large Credits (CRILC) and
other related documents and reports including evaluation of the past trends of management
judgement, governance, and review of internal control. Held discussion with the management
of the Bank on various accounts wherein there has been stress and steps taken to mitigate
such risks.
• We have also assessed disclosure requirements for classification
and provisioning ofNPAs in accordance with the RBI circulars including those specifically
issued for Covid 19 related matters.
B. Information Technology (IT) Systems and
Controls
Key Audit Matter
The IT environment of the Bank is complex. The
Bank?s operations utilise many independent and inter-dependent
information technology systems for processing and recording large volume of transactions
in numerous locations level ofon management daily basis. As a result, there
is a high degree of reliance and dependency on such IT systems for financial reporting
process of the Bank. Controls over access and changes to IT systems are critical to the
recording of financial information and the preparation of Standalone Financial Statements.
Appropriate automated general and application controls are required to
ensure that such IT systems and applications are able to process the data, as required,
completely, accurately and consistently, which directly impact the completeness and
accuracy of financial reporting
The IT systems and controls is identified as a key audit matter because
of high level of automation, significant complexity of the IT infrastructure and its
impact on the financial reporting system since our audit approach could
significantlydiffer depending on the effective operation of the Bank?s IT controls.
Auditor?s Response
We tested the technology control environment for key IT applications
(systems) used in processing significanttransactions and recording balances in the general
ledger. We also tested key automated controls embedded within these systems which link the
technology-enabled business processes. Our further audit procedures included:
Assessing the governance and higher-level controls across the IT
Environment and performing review of IT general controls.
Evaluation and understanding the key IT systems being used by the Bank
for its Core
Banking and other operations.
Assessing operative effectiveness of key controls within various
business processes. It included testing of integrity of system interfaces, completeness
and accuracy of the data, system reconciliation controls and automated calculations.
Design and operating effectiveness testing of controls across the User
Access Management, Change Management, backup, other IT operational controls as well as
effectiveness testing of automated business process controls.
• Data integrity of critical system reports used by us in our
audit to select samples and analyse data used by management to generate financial reports.
C. Direct and Indirect Taxes Key Audit Matter
This matter has been identified as a Key Audit
Matter due to the significant Integrated Annual Report 2022-23 judgment
required in the estimation of provision for taxes including any write back of provisions,
due to factors like uncertain tax positions and provision for tax involves interpretation
of various rules and law.
It also involves consideration of on-going disputes and disclosures.
Auditor?s Response
• Our audit procedures to test uncertain tax positions included
understanding processes, evaluation of adequacy of design and
171 implementation of controls and testing of operating effectiveness
of controls over provision for taxation, assessment of uncertain tax positions and
disclosure of contingencies.
• We have obtained details of completed tax assessments and
demands from the management of the Bank.
• We discussed with appropriate senior management personnel,
independently assessed management?s estimate of the possible outcome of disputed
cases; and evaluated the management?s underlying key assumptions in estimating the
tax provisions.
• We considered legal precedence and other rulings in evaluating
management?s position on these uncertain tax positions, the provisions made, and/or
write back of the provisions.
• We have also relied upon the opinion given by tax specialist in
evaluating management?s assessment for the uncertain tax positions. For those matters
where management concluded that no provision should be recorded, we also considered the
adequacy and completeness of disclosures.
D. Centralised Audit of the Bank Key Audit Matter
Till year 2020-21, the audit of Branches (other than top 20 branches
and certain other locations) was carried out by the Branch Statutory Auditors appointed by
the Bank. However, since previous year, the Joint Statutory Auditors have performed the
audit of the Bank centrally. Considering this fact, it has been considered as a key audit
matter.
Auditor?s Response
We have assessed the Bank?s systems and procedures for carrying
out centralized operations under various areas including process of consolidation at the
central level.
• Visited certain branches to understand the operations carried
out at Branches and potential issues.
• Performed analysis of information provided at central level.
• Reviewed the reports in respect of various audits including
concurrent audit, internal inspections carried out at branches on a sample basis.
Information Other than the Standalone Financial
Statements and Auditors? Report thereon
The Bank?s Board of Directors are responsible for the other
information. The other information comprises the Corporate Overview, Directors?
Report including annexures to Directors? Report, Management Discussion and Analysis,
Basel III Pillar 3 disclosures and Corporate Governance report included in the Annual
Report, but does not include the Standalone and Consolidated Financial Statements and our
auditors? report thereon.
The other information is expected to be made available to us after the
date of this auditor?s report.
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 identified above when it becomes
available and, in doing so, consider whether such other information is materially
inconsistent with the Standalone Financial Statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated.
When we read the other information, if we conclude that there is a
material misstatement therein, we are required to communicate the matter to those charged
with governance.
Responsibilities of Management and Those Charged with Governance for
the Standalone Financial
Statements
The Bank?s Board of Directors is responsible for the matters
stated in Section 134(5) of the Act with respect to the preparation of these Standalone
Financial
Statements that give a true and fair view of the financial position,
financial performance and cash flows
Bank in accordance with the accounting principles generally accepted in
India, including the Accounting Standards prescribed under section 133 of the Act read
with the Companies (Accounting Standards) Rules,
2021 in so far as they apply to the Bank and provisions of Section 29
of the Banking Regulation Act, 1949 and circulars and guidelines issued by the RBI from
time to time. This responsibility also includes maintenance of adequate accounting records
in accordance with the provisions of the Act and the Banking Regulations Act, 1949 for
safeguarding of the assets of the Bank and for preventing and detecting frauds and other
irregularities; selection and application of appropriate accounting policies; making
judgments and estimates that are reasonable and prudent; and the 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 Standalone Financial Statements that give a true and
fair view and are free from material misstatement, whether due to fraud or error.
In preparing the Standalone Financial Statements, the Management and
the Board of Directors is responsible for assessing the Bank?s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the
going concern doubt onbasis of accounting unless the Board of Directors either intends to
liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
The Board of Directors is also responsible for overseeing the
Bank?s financial reporting process.
Auditor?s Responsibilities for the Audit of the
Standalone Financial Statements
Our objectives are to obtain reasonable assurance about whether the
Standalone Financial Statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an Auditor?s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with SAs will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these Standalone Financial Statements.
We consider As part of an audit in accordance with SAs, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
• Identifyandassesstherisksofmaterialmisstatement of the
Standalone Financial Statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit sufficient andauditappropriate
evidence that is deficiencies in internal 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 Bank has adequate internal financial controls system with
reference to Standalone 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 in the Standalone Financial
Statements made by Management.
Conclude on the appropriateness of Management?s use of the going
concern basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant Bank?s
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor?s report to the related disclosures
in the Standalone Financial Statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of
our Auditor?s report. However, future events or conditions may cause the Bank to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the
Standalone Financial Statements, including the disclosures, and whether the Standalone
Financial Statements represent the underlying transactions and events in a manner that
achieves fair presentation.
Materiality is the magnitude of the misstatements in the Standalone
Financial Statements that, individually or aggregate, makes it probable that the economic
decisions of a reasonably knowledgeable user of the Standalone
Financial Statements may be influenced. quantitative materiality and
qualitative factors in (i) planning of the scope of our audit work and evaluating the
results of our work; and (ii) to evaluate the effect of any identified misstatement in the
Standalone Financial
Statements.
We communicate with those charged with governance regarding, among
other matters, the planned scope and timing of the audit and significant including any
significant that we identify during our audit.
We also provide those charged with governance with a statement that we
have complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be thought
to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the Standalone
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
1. The Standalone Balance Sheet and the Standalone
Profit and Loss Account have been drawn up in accordance with Section
29 of the Banking Regulation Act, 1949 and Accounting Standards as per section 133 of the
Act read with the Companies (Accounting Standards) Rules, 2021.
2. As required by sub-section (3) of section 30 of the Banking
Regulation Act, 1949, we report 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 and have found them to be satisfactory;
b) the transactions of the Bank, which have come to our notice, have
been within the powers of the Bank; and
c) The financial accounting systems of the Bank are centralized and
therefore, accounting returns for the purpose of preparing financial statements are not
required to be submitted by its branches. However, during the course of our audit, we have
visited 99 branches and offices for the purpose of understanding the processes, perform
necessary walkthroughs and test of controls and examine the records maintained at such
branches and offices.
3. With respect to the matter to be included in the auditor?s
report under section 197(16) of the Act, we report that since the Bank is a banking
company, as defined under the Banking Regulation Act, 1949; the reporting under section
197(16) in relation to whether the remuneration paid by the Bank is in accordance with the
provisions of section 197 of the Act and whether any excess remuneration has been paid in
accordance with the aforesaid section, is not applicable.
4. Further, as required by Section 143(3) of the Act, based on our
audit, we further 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.
(b) in our opinion, proper books of account as required by law have
been kept by the Bank so far as it appears from our examination of those books.
(c) the Balance Sheet, Profit and Loss Account and the Cash Flow
Statement dealt with by this Report are in agreement with the books of account.
(d) in our opinion, the aforesaid Standalone Financial Statements
comply with the
Accounting Standards specified under section 133 of the Act read with
the Companies (Accounting Standards) Rules, 2021 to the extent they are not inconsistent
with the policies prescribed by the RBI.
(e) on the basis of the written representations received from directors
as on March 31, 2023 and taken on record by the Board of Directors, none of the directors
is disqualified as on March
31, 2023 from being appointed as a director in terms of section 164(2)
of the Act.
(f) with respect to the adequacy of internal financial controls with
reference to the Standalone Financial Statements of the Bank and the operating
effectiveness of such controls, our separate report in Annexure A is attached.
(g) the entity being a banking company as defined under Banking
Regulation Act, 1949, the remuneration to its directors during the year ended 31 March
2023 has been paid / provided by the Bank in accordance with the provisions of Section 35B
(1) of the Banking Regulation Act, 1949.
(h) with respect to the other matters to be included in the Auditors
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 knowledge and belief and according to the
information and explanation given to us:
i. The Bank has disclosed the impact of pending litigations on its
financial position in Note 17 of Schedule 18 to the Standalone
Financial Statements.
ii. There are no material foreseeable losses in respect of long-term
contracts including derivative contracts.
iii. There has been no delay in transferring amounts, required to be
transferred, to the Investor Education and Protection
Fund 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 the note 21 (a) of Schedule 18 to the Standalone
Financial Statements, no funds have been advanced or loaned or invested (either from
borrowed funds or share premium or any other sources or kind of funds) by the Bank to or
in any other person(s) or entity(ies), including foreign entities
("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 Bank
("Ultimate Beneficiaries") or provide any guarantee, security or the like on
behalf of the Ultimate Beneficiaries;
(b) The management has represented that, to the best of its knowledge
and belief, as disclosed in the note 21 (b) of Schedule 18 to the Standalone Financial
Statements, no funds have been received by the Bank from any person(s) or entity(ies),
including foreign entities ("Funding Parties"), with the understanding, whether
recorded in writing or otherwise, that the Bank 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
Based on the audit procedures that have been considered reasonable and
appropriate in the circumstances, nothing has come to our notice that has caused us to
believe that the representations under sub-clause (iv) (a) and
(iv) (b) contain any material misstatement.
v. (a) The final dividend proposed for the previous year, declared, and
paid by the Bank during the year is in accordance with Section 123 of the Act, as
applicable.
(b) As stated in the note 19 of Schedule 18 to the Standalone Financial
Statements, the Board of Directors of the Bank have proposed final dividend for the year
which is subject to the approval of the members at the ensuing Annual General Meeting.
The dividend proposed is in accordance with section 123 of the Act, to
the extent it applies to declaration of dividend, as applicable until the date of this
report.
vi. As proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 is
applicable for the Bank only with effect from April 1, 2023, reporting under Rule 11(g) of
the Companies (Audit and Auditors) Rules, 2014, is not applicable.
Annexure "A" to the Independent Auditor?s Report
(Referred to in paragraph 4 (f) under ‘Report on Other Legal and
Regulatory Requirements? section of our report of even date on the Standalone
Financial Statements of the Karnataka Bank Limited for the year ended March 31, 2023)
Report on the Internal Financial Controls with reference to Standalone
Financial Statements
We have audited the internal financial controls with reference to
Standalone Financial Statements of The Karnataka Bank Limited ("the Bank") as of
March 31, 2023 in conjunction with our audit of the Standalone Financial Statements of the
Bank for the year ended on that date.
Management?s Responsibility for Internal Financial and
appropriate tosufficient
Controls
The Bank?s management is responsible for establishing and
maintaining internal financial controls based on the internal control with reference to
Standalone Financial Statements criteria established by the Bank considering the essential
components of internal control stated in the
Guidance Note on Audit of Internal Financial Controls Over Financial
Reporting issued by the Institute of Chartered Accountants of India (the
"ICAI"). These responsibilities include the design, implementation and
maintenance of adequate internal financial controls that were operating effectively of its
business, including adherence to the Bank?s policies, the safeguarding of its assets,
the prevention and detection of frauds and errors, the accuracy and completeness of the
accounting records, and the timely preparation of reliable financial information, as
required under the Act and the Banking Regulation Act, 1949 and the circulars and
guidelines issued by the RBI.
Auditor?s Responsibility
Our responsibility is to express an opinion on the Bank?s internal
financial controls with reference to Standalone
Financial Statements based on our audit. We conducted our audit in
accordance with the Guidance Note on Audit of Internal Financial Controls Over Financial
Reporting (the "Guidance Note") issued by the ICAI and the Standards on Auditing
(SAs) issued by the ICAI and deemed to be prescribed under section 143 (10) of the Act, to
the extent applicable to an audit of internal financial controls. Those Standards and the
Guidance Note require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether adequate internal financial controls
with reference to
Standalone Financial Statements were established and inmaintained and
if such controls operated effectively all material respects.
Our audit involves performing procedures to obtain audit evidence about
the adequacy of the internal financial controls with reference to Standalone Financial
Statements and their operating effectiveness. Our audit of internal financial controls
with reference to
Standalone Financial Statements included obtaining an understanding of
internal financial controls with reference to Standalone Financial Statements, assessing
the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal financial controls based on the assessed risk. The
procedures selected depend on the auditor?s judgement, including the assessment of
the risks of material misstatement of the Standalone Financial Statements, whether due to
fraud or error.
We believe that the audit evidence we have obtained, is a basis for our
audit opinion on the Bank?s internal financial controls with reference to Standalone
Financial Statements.
Meaning of Internal Financial Controls with reference to Standalone
Financial Statements
A Bank?s internal financial controls with reference to
Standalone Financial Statements is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of Standalone
Financial Statements for external purposes in accordance with generally
accepted accounting principles. A Bank?s internal financial controls with reference
to Standalone
Financial Statements includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Bank; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
Standalone Financial Statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Bank are being made only in
accordance with authorisations of management and directors of the Bank; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorised acquisition,
use, or disposition of the
Bank?s assets that could have a material effect on the
Standalone Financial Statements.
Inherent Limitations of Internal Financial Controls with reference to
Standalone Financial Statements
Because of the inherent limitations of internal financial controls with
reference to Standalone Financial Statements, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may
occur and not be detected. Also, projections of any evaluation of the internal financial
controls with reference to Standalone
Financial Statements to future periods are subject to the risk that the
internal financial controls with reference to Standalone Financial Statements may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Opinion
In our opinion, and to the best of our information and according to the
explanations given to us, the Bank has, in all material respects, adequate internal
financial controls with reference to Standalone Financial Statements and such internal
financial controls were operating foreffectively internal control with reference to
Standalone Financial Statements established by the Bank considering the essential
components of internal control stated in the
"Guidance Note on Audit of Internal Financial Controls Over
Financial Reporting" issued by the ICAI.
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