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Audit watchdog set to widen inspections

Audit watchdog set to widen inspections



India’s top eight auditors will be inspected and the financial statements of up to 60 of their clients vetted this year, as the national audit watchdog widens efforts to enhance audit quality countrywide.

The National Financial Reporting Authority (NFRA) which last year inspected five auditors, involving audit reports of 24 clients, is planning to expand the exercise, a person informed about the development said.

“This year, inspections would be done on eight audit firms and in the case of audit firms inspected last year, audit documentation of a different set of audit clients will be examined. The reports would be brought out by end of December,” the person cited above said on condition of anonymity.

Also read: NFRA flags gaps in statutory audits done by top audit firms

Making improvements

Covering the clients of top audit firms is expected to capture the areas where accounts and audits may need specific attention of the management, audit committees and audit professionals for making improvements. 

An email sent to the NFRA on Wednesday seeking comments remained unanswered at the time of publishing.

The audit regulator had conducted inspections at five top auditors—Deloitte Haskins & Sells LLP, SRBC & Co. LLP, Price Waterhouse Chartered Accountants LLP, BSR & Co—last year. The reports were released in December.

In the case of Price Waterhouse, audit files of four of its clients were reviewed by the regulator, while in the case of Deloitte, SRBC, BSR and Walker Chandiok, audit files of five clients each were examined as part of the inspection.

Also read: NFRA brings out norms for inspecting audit firms

Quality compliance

Inspecting audit firms to check their compliance with audit quality norms under the Companies Act and the Institute of Chartered Accountants of India’s (ICAI) norms is part of the regulator’s efforts to ensure that financial statements are prepared by businesses as per prescribed rules, their audit is compliant with quality norms and the service of audit professionals gets improved.

The reports are made public to give the audit firm as well as the industry in general a perspective on areas of deficiency in the way financial statements are made and how they are audited. Though it is not a disciplinary proceeding, the regulator’s report has a strong persuasive power on audit firms and their clients to take corrective action where deficiencies are detected. The inspection reports do not name the business client of the auditor, but explains what is wrong with its accounts and audit.

Also read: Coming soon: NFRA’s reports on top 5 auditors

Sensitizing audit firms

“Identifying audit files of six-seven audit clients of audit firms for quality review, selected based on appropriate criteria, would be a good sample size for an audit regulator for making an assessment of audit quality firm-wide and quality of audit performed,” said Ashok Haldia, an expert in accounting and auditing. Haldia explained that the regulator’s recent inspection reports have sensitized audit firms and audit teams to take a deep look at their existing quality control systems and processes and application of those while carrying out audits. “This helps them in strengthening quality control systems, build capacity and increase use of technology,” said Haldia.

The watchdog has repeatedly raised the point of auditors in several cases not being sceptical about the assertions of the management. Some of the key areas where the regulator takes a long hard look include whether the audit firm has complied with independence norms, whether or not auditor disqualification provisions in the Companies Act are attracted and the integrity of the audit documentation. The regulator also takes note of any specific step taken by audit firms to enhance the confidence of the stakeholders in the audit.


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