The National Financial Reporting Authority ( NFRA ) has issued a circular clarifying the responsibilities of Principal Auditors and Other Auditors in group audits, highlighting their roles in safeguarding public interest.
This circular, dated October 3, 2024, addresses recurring issues of audit failures and emphasises strict adherence to the Standards on Auditing (SAs) and the Companies Act, 2013.
Principal Auditors, who are responsible for issuing audit opinions on group financial statements (GFS), must ensure that they follow SA 600, which governs the use of the work of Other Auditors.
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The NFRA circular reiterates that Principal Auditors cannot rely solely on the reports of Component Auditors. They must ensure that adequate audit procedures are performed and sufficient evidence is gathered to support their overall opinion on the GFS. Specifically, Principal Auditors are required to:
The circular points to several high-profile cases of audit failure, such as the Reliance Capital Group, Coffee Day Enterprises, and IL&FS, where auditors failed to detect fraud and financial irregularities. These lapses resulted in significant financial losses, amounting to tens of thousands of crores, and severely impacted public and investor trust.
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NFRA specifically noted that some Principal Auditors had misinterpreted their responsibilities under SA 600, choosing to rely on the clean reports of Component Auditors without adequately verifying the underlying financial information. This misinterpretation has led to widespread negligence, allowing fraud and mismanagement to go unchecked.
The circular stresses that the provisions in SA 600, which use the word “should,” must be treated as presumptively mandatory. NFRA emphasized that auditors cannot selectively apply audit procedures or rely solely on Component Auditors without proper evaluation. The Principal Auditor must ensure compliance with all auditing standards and document any alternative procedures if they choose not to follow the specified requirements.
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The NFRA circular serves as a strong reminder to auditors of their responsibility to protect public interest. The authority highlights the interconnectedness of various standards, including SA 200, which outlines the overall objectives of an auditor, and SA 315, which covers the identification and assessment of risks.
These standards require auditors to exercise professional scepticism, maintain rigorous audit procedures, and ensure that the audit opinion is based on sufficient and appropriate evidence.
Auditors are now under renewed obligation to align their work with CA 2013 and other related standards, or face strict enforcement actions from NFRA.
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With immediate effect, all auditors of entities governed under NFRA rules are required to adhere strictly to the obligations outlined in this circular.
This circular not only clarifies existing responsibilities but also seeks to prevent future audit failures that could harm public interest.
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