The National Financial Regulatory Authority ( NFRA )has published its audit quality inspection guidelines as a step towards further improving the quality of the audit profession. The inspection guidelines are on the lines of the best practices followed by International Audit Regulators. In fact, Audit quality inspections are integral to the functioning of independent audit regulators, worldwide. The International Forum for Independent Audit regulators (IFIAR), which comprises independent audit regulators from 54 countries, requires that audit regulators, should as a minimum, conduct recurring inspections of audit firms undertaking audits of public interest entities in order to assess compliance with applicable professional standards, independence requirements, and other rules, laws, and regulations.
Also, in response to NFRA’s consultation paper “Enhancing Engagement with Stakeholders’ in 2021, many stakeholders suggested onsite inspection of audit firms by NFRA to help inspection teams familiarize themselves with the systems and processes followed by audit firms and also to enable the audit firms to comply with auditing standards, guidance, etc in its audits.
NFRA’s inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control. Inspections will consist of a firm-wide review of audit quality (SQC 1) and individual file reviews on a test-check basis to evaluate the level of compliance with applicable auditing standards and quality control policy and processes. NFRA has clarified that inspections by nature, are distinct from investigations. However, in certain cases, test-check by the inspection teams may provide the basis for enforcement or investigation under applicable provisions of the Act and Rules.
In keeping with the functions entrusted to NFRA under section 132 of the Companies Act 2013, audit quality inspections are a key tool for the Regulator to fulfill its statutory obligations. The mandate for inspections is derived under section 132 (2) of the Companies Act 2013 (Act, hereinafter) and relevant provisions in NFRA Rules 2018.
Audit quality inspections, world-wide1, are integral to the functioning of independent audit regulators. An inspection generally consists of firm-wide quality reviews and/or test-check of individual audit assignments to evaluate the level of compliance with applicable auditing standards and quality control policies and processes.
As per the guidelines, inspections will involve a review of the quality control policy, a review of certain focus areas, a test check of the quality control processes, and a test check of audit engagements performed by the audit firm/auditor during the year, as may be identified by the inspection teams. The inspected auditor/audit firm would have no role, whatsoever, in any selection by NFRA of the audit firm/auditor or test-check of individual audit engagements undertaken by the audit firm/auditor, the selection of which will only be made by the inspection team.
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