NFRA Outlines Three Audit Firms' Flaws in Audit Quality
The regulator claims that the audit firm has not addressed the issues raised in the prior inspection report regarding the auditor's independence, audit documentation, and EQCR
NFRA – NFRA Outlines – NFRA Outlines Three Audit Firm – Three Audit Firms – Three Audit Firms’ Flaws in Audit Quality – Audit Quality – taxscan
NFRA – NFRA Outlines – NFRA Outlines Three Audit Firm – Three Audit Firms – Three Audit Firms’ Flaws in Audit Quality – Audit Quality – taxscan
Three audit companies have had some of their audit quality issues brought to light by the National Financial Reporting Authority (NFRA). The NFRA's three distinct inspection reports of Walker Chandiok & Co LLP, Deloitte Haskins & Sells LLP, and SRBC & Co LLP contain the observations.
The three audit categories of related party transactions, internal financial control over revenue financial reporting, and impairment of non-financial assets were the subject of the regulator's 2024 audit quality inspection report on SRBC & Co LLP.
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The regulator states that SRBC & Co LLP should establish a strong procedure to handle any risks to independence that might arise from the exclusion of specific services from the definition of non-audit services. To guarantee complete adherence to the rules and regulations, the audit firm should reevaluate its policy prohibiting holding companies of NFRA-regulated audit customers engaged in private equity operations from offering non-audit services.
The EY network has offered its audit customers 'Financial Reporting and Accounting Advisory Services' in seven instances during 2022–2023 and four instances during 2023–2024. This suggests that the company might be breaking rules and regulations.
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The NFRA, among other things, recommended that the audit firm reevaluate its policy to steer clear of indirect business relationships through EY Network entities and establish a strong procedure to guarantee complete adherence to Section 141(3)(e) of the Companies Act.
To ensure complete compliance with section 141(3)(f) of the Act, the company should rethink its policy and replace the word "financial reporting oversite role" with "key managerial person." This section should be applied to all partners and their family members in the EY network.
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According to NFRA, one or more audit procedures carried out by the firm were found to be inadequate in all three of the engagements that were chosen with regard to related party transactions. For example, the firm failed to verify the final use of the proceeds of the loans that the company made to its subsidiaries and failed to assess the foundation of the management's claim of arm's length pricing of related party transactions.
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In March 2024, the authority started Deloitte Haskins & Sells LLP's audit quality checks. Among other things, it concentrated on three areas: related party transactions, internal financial control over revenue financial reporting, and impairment of non-financial assets because of their higher potential of material misrepresentation.
In the engagement files selected for review in the current inspection cycle, NFRA said it has observed the entity not performing sufficient appropriate audit procedures for the verification of related party transactions being on arm's length basis as per SA 620.
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Also, inadequate evaluation of competence, capability, objectivity and work of the auditor's expert as per the requirements of SA 620 have been observed, it noted. Meanwhile, NFRA also said the audit firm has adopted a revised networking agreement wherein the audit executive committee has the ultimate responsibility for quality control and risk management.
In order to guarantee staff independence, the audit firm has also modified the process. The audit company has also begun to incorporate EQCR (Engagement Quality Control Review) work into the audit file itself, as opposed to creating a separate EQCR docket.
In August 2024, the regulator carried out an audit quality inspection in the Walker Chandiok & Co LLP (WCCL) case. Due to their inherent higher risk of material misstatement, related party transactions, impairment of non-financial assets, and ICFR-revenue were the three areas of focus for the three audit engagements of financial statements for the year ended March 31, 2023, which were included in the scope of the inspection.
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The regulator claims that the audit firm has not addressed the issues raised in the prior inspection report regarding the auditor's independence, audit documentation, and EQCR. Additionally, it stated that problems in the impairment of non-financial assets, related party transaction verification, and ICFR (Internal Control over Financial Reporting)-revenue were found in three engagement files chosen for evaluation during the current inspection cycle.
Additionally, according to its 2022 inspection report, NFRA stated that the organization was a member of the global network known as Grant Thornton International Ltd (GTIL). However, WCCL has insisted that it is not a part of the GTIL network in its correspondence with NFRA. On March 28, the agency released the three distinct reports.
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