On 11 November 2022, the National Financial Reporting Authority (NFRA) published its audit quality inspection guidelines. The overall objective of inspections is to evaluate compliance of the audit firm/auditor (together termed as ‘auditors’) with auditing standards and other regulatory and professional requirements, as well as the sufficiency and effectiveness of quality control system of the auditors including:
- Adequacy of governance framework and its functioning
- Effectiveness of firm’s internal control over audit quality
- System of assessment and identification of audit risks and mitigating measures.
Further the guidelines discuss the following aspects:
- Criteria and scope
- Methodology for selection
- Inspections
- Inspection report.
Criteria and scope
Criteria: The criteria for audit quality inspections include :
- Provisions in the Companies Act 2013, NFRA Rules, 2018 and amendments thereof
- Standard on Quality Control (SQC) 1, including code of Ethics
- Standards of Auditing
- Policies , guidelines, manuals etc. of the audit firm
- Ind AS as may be applicable to selected individual audit engagements
- Relevant circulars/directions of other regulators as applicable
- Directions issued by internal quality boards/committees and Quality Review Board (QRB), ICAI as may be applicable.
Scope: The scope of audit and a change in the scope of audit would be intimated to auditors. Inspections could also lead to financial reporting quality reviews of financial statements of the companies whose audits are selected for inspections
Methodology for selection
Selection of auditors: Selection of audit firms and determination of periodicity of their inspections is based on:
- Assessment of risks in the audit environment
- Size of the firm
- Composition and nature of the audit firm
- Number of audit engagements completed in the year end review
- Complexity and diversity of preparer financial statements audited by the audit firm
- Specific concerns highlighted by the government
- Other indicators as determined by NFRA
Selection of audit assignment: : Selection of audit engagement will be on the basis of both risk based and random selection and also on the basis of financial and non-financial indicators identified by NFRA.
Inspections
For the purpose of inspections, NFRA will issue questionnaires and request auditors to keep relevant records ready. Further, the inspection has been explained as below.
- Start of inspection: At the start of inspections, NFRA will hold meeting with senior management of audit firms to understand working of the auditors and/or have enquiry meeting(s) with audit engagement team
- Execution cycle:The execution cycle will comprise site-visits, interviews, review of controls, substantive testing, issue of queries and observations and follow-up of previously issued observations (in case of recurring inspections). Auditors would be required to provide written responses to queries, observations, confirmations etc.
- Closing: Inspections would close with a meeting with the senior management of the audit firm or with the auditor, and issuance of a draft inspection report for obtaining responses of the auditors.
Inspection report
The inspection report would comprise the NFRA’s inspection approach in brief, findings or non-compliances, responses of the auditors, NFRA’s conclusions and recommendations and any other matter deemed significant by the inspection team.
(Source: Foundation for Audit Quality’s analysis, 2022 read with NFRA press release id: 1875275, dated 11 November 2022)
To access the text of the audit quality inspection guidelines, please click here