Regulatory updates

Standard on Auditing (SA) 505, External Confirmations recognises that external confirmations are an integral method of obtaining audit evidence. Over the years, auditors have been using external confirmation procedures for obtaining account balances confirmation from various parties (confirming parties), such as banks, creditors, debtors, third-parties in possession of auditee’s investments/property etc.

However, it has come to the notice of the ICAI that, in recent years, auditors are facing various difficulties in obtaining external confirmations from banks. One of the major concern in this regard is that some banks are using services of third-party vendors to provide confirmations on their behalf to auditors. Use of third-party vendors leads to the risk that the information provided by third-party vendors may not be authentic and complete. Further, it is not clear as to who will be responsible in case there is failure of IT controls at the end of third-party vendors which may impact the integrity of information provided.

These factors raise a question as to who will be held responsible for authenticity and completeness of information provided to auditors, the concerned bank or such third-party vendors. Presently, there is no legal framework/guidelines to deal with these aspects. Thus, auditors are exposed to serious risk, in case they use the confirmation from such third-party vendors as audit evidence.

In this regard, ICAI, vide an announcement dated 7 September 2022 advised the auditors to seek direct confirmation from the concerned banks.

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To access the text of the announcement, please click here

In July 2021, ICAI had issued the Audit Quality Maturity Model Version 1.0 (AQMM v1.0), comprising of a set of different Audit Quality Indicators (AQIs) to enable audit firms to self-evaluate their current level of audit maturity, identify areas where they lack and thereby help them in developing a roadmap for upgrading to a higher level of maturity. AQMM was introduced with an aim to move away from the traditional approach of enforced regulation to a more modern self-compliant model for the audit firms.

Initially, AQMM v1.0 was recommendatory and covered certain firms

The ICAI, vide a notification dated 13 September 2022 issued the revised version of the AQMM – Audit Quality Maturity Model Revised Version 1.0 (AQMM Rev v1.0). This is a mandatory evaluation of the audit quality maturity of firms auditing the following class of entities:

1. A listed entity, or
2. Banks other than co-operative banks (except multi-state cooperative banks), or
3. Insurance companies.

However, firms doing only branch audits are excluded from the mandate.

The requirement for mandatory evaluation of AQMM is with effect from 1 April 2023.

Similar to AQMM v1.0, the AQMM Rev v1.0, includes the following dimensions of audit maturity categorised into three sections:

1. Practice Management – Operation,
2. Human Resource Management, and
3. Practice Management – Strategic/Functional.

Each of the aforementioned sections consist of the related AQIs and firm’s maturity rating would be determined based on the score achieved in each section.

It has also been provided that the scores and level arrived at would be subject to review by a peer reviewer alongside the peer review cycle, which falls anytime on or after 1 April 2023. The level, so arrived at, after being reviewed by the peer reviewer should be hosted on the website of the ICAI alongside the details of the peer review certificate.

The firm(s) can get their scores reviewed by an AQMM reviewer⁵ before their peer review cycle falls due. Also, the firms whose last peer review cycle has been completed and not a year has lapsed from the date of the last review, such firms can get their scores reviewed before their next peer review falls due by an AQMM reviewer. However, it has been stated that the subsequent reviews would necessarily be aligned to the peer review cycle and that the period of review in no case would be less than a year.

In this regard, ICAI has also released the Implementation Guide (IG) to the AQMM v1.0. The IG has been issued in the form of various implementation clues, which are practice based.

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5. AQMM reviewer is a member of the ICAI and empaneled as a peer reviewer. He/she is appointed by the Peer Review Board for conducting an AQMM review any time before the peer review cycle of the firm falls due.

To access the text of ICAI’s notification, please click here

To access the text of the IG, please click here

To access the text of AQMM Rev v1.0, please click here

In January 2019, ICAI had issued the 12^th edition of the Code of Ethics (Code of Ethics, 2019), coming into effect from 1 July 2020. However, applicability of certain provisions of Volume-I of the Code of Ethics, 2019 (the Code) had been deferred on account of situations prevailing at the given time due to Covid-19. These included provisions relating to:

• Responding to Non-Compliance with Laws and Regulations (NOCLAR),
• Fees - relative size, and
• Tax services to audit clients.

ICAI, vide an announcement dated 29 September 2022 (the amendment) has made the above-mentioned provisions applicable with effect from 1 October 2022 with certain amendments. Some of the significant amendments issued in this regard include:

• Amendment to provisions relating to ‘Responding to Non-Compliance with Laws and Regulations (NOCLAR)’

• Section 260 of the Code specifies the provisions for responding to Non-Compliances with Laws And Regulations (NOCLAR), which is applicable to professional accountants in service. As per the extant requirements, the provisions were applicable to all the employees of listed entities. However, the amendment has now narrowed down the applicability criteria to only senior professional accountants in service⁶, who are in employment of the listed entities. The amendment has also clarified that senior professional accountants in service refer to key managerial personnel.

• Section 360 of the Code guides professional accountants in public practice in assessing the implications of the matter and the possible courses of action when responding to NOCLAR during the course of audit engagements of listed entities.

There are certain amendments with respect to the applicability of Section 360 of the Code, the definition of an ‘audit’ or ‘audit engagement’ and measures to be taken in case of an imminent breach. These are discussed below:

(Source: ICAI announcement dated 29 September 2022 (Applicable date of certain deferred provisions of Volume-I of Code of Ethics, 2019))

Amendment to provisions relating to ‘Fees-relative size’

As per paragraph 410.3 of the Code, when the total fees generated from an audit client by a firm expressing an audit opinion on the financial statements of that client, represents a large proportion of the total fees of that firm, the dependence on that client and concern about losing the client creates a self-interest or intimidation threat (commonly referred to as threats).

Paragraphs 410.3 - R410.6 of the Code prescribe about factors that need to be evaluated while assessing the threats, and actions that can be taken to safeguard against such threats, etc. These provisions are applicable from 1 October 2022, with certain amendments, which are discussed below:

(Source: ICAI announcement dated 29 September 2022 (Applicable date of certain deferred provisions of Volume-I of Code of Ethics, 2019))

Amendment to provisions relating to ‘Tax services to audit clients’

Sub Section 604 of the Code specifies the provisions relating to rendering of tax services to audit clients. As per sub-section 604, providing tax services to an audit client might create a self-review or advocacy threat. In order to mitigate such threats, sub-section 604 of the Code includes requirements that prohibit firms and network firms from providing certain tax services to audit clients in some circumstances.

One such service prescribed in sub-section 604 of the Code includes ‘Assistance in the Resolution of Tax Disputes’, wherein a firm or a network firm has been prohibited from providing services involving acting as an advocate for certain audit clients, before a court in the resolution of a tax matter.

Sub-section 604 further defines what would be considered as a court. This definition has been amended as below:

Existing provision	Amendment notified by ICAI
In case of Assistance in the resolution of Tax disputes, the term “Court” is explained as under: What constitutes a ‘Court’ depends on how tax proceedings are heard in India.	In case of Assistance in the resolution of Tax disputes, the term “Court” is explained as under: For the purpose of this sub-section, ‘Court’ does not include a Tribunal

(Source: ICAI announcement dated 29 September 2022 (Applicable date of certain deferred provisions of Volume-I of Code of Ethics, 2019))

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6. Senior professional accountants in service (‘senior professional accountants’) are directors, officers or senior employees who are able to exert significant influence over, and make decisions regarding, the acquisition, deployment and control of the employing organisation’s human, financial, technological, physical and intangible resources. They refer to the Key Managerial Personnel (KMP) of the entity
7. Audit engagement has been defined as ‘A reasonable assurance engagement in which a professional accountant in public practice expresses an opinion whether financial statements are prepared in all material respects (or give a true and fair view or are presented fairly, in all material respects), in accordance with an applicable financial reporting framework, such as an engagement conducted in accordance with Standards on Auditing. This includes a Statutory Audit, which is an audit required by legislation or other regulation’
8. This includes fees received by the firm for other services rendered through the medium of a different firm or firms in which such member or firm may be a proprietor or partner.
9. This includes audit of government companies, public undertakings, nationalised banks, public financial institutions or where appointments of auditors are made by the Government.

To access the text of the announcement, please click here

To access the text of the detailed provisions (with amendments), please click here

To access the text of the Code of Ethics, 2019, please click here