Summary: The National Financial Reporting Authority (NFRA) has raised concerns over audit procedures followed by three major firms—SRBC & CO LLP (EY), Deloitte Haskins & Sell LLP, and Walker Chandiok & Co LLP (Grant Thornton). In its inspection report for 2022–2024, NFRA identified recurring issues, including auditor independence, inadequate verification of internal controls over financial reporting (ICFR), and lack of scrutiny in related party transactions. The report highlights that auditors provide non-audit advisory services to their clients, potentially compromising their independence. Additionally, weak financial controls in revenue transactions and estimated-based reporting raise red flags. Related party transactions remain unchecked, particularly concerning the end-use of loans and claims of arm’s-length pricing. Another significant issue is the failure to assess major impairments in non-financial assets, which could impact the going concern status of entities. NFRA also pointed out the absence of competency evaluations for experts under SA 620 and non-compliance in conducting Engagement Quality Control Reviews (EQCR). Audit documentation remains a persistent concern. The report calls on ICAI to introduce mandatory reporting formats, including checklists and detailed disclosures, similar to Bank Audit LFAR, to enhance transparency. ICAI is urged to strengthen core audit procedures through structured programs and certification courses rather than focusing solely on technology. NFRA underscores that technological advancements are ineffective if fundamental audit processes are not robust.
AUDIT QUALITY – A SERIOUS CONCERN:
Again pointed out by supreme body of Auditors- NFRA ( National Financial Reporting Authority) in it’s 3 inspection report released separately on 28/03/25 for audit procedures followed by three big audit firms as reported in PTI.
These three firms are – SRBC & CO LLP ( part of EY and SR Botliboi), Deloitte Haskins & Sell LLP and Walker Chandiok & Co LLP ( part of Grant Thorton International Ltd).
NFRA inspected assignments of these firms covering the period from 2022 to 2024 for verification started in April 24. The audit quality concerns being flagged by the supreme authority brings out the following issues which needs to be debated to draw standard procedures and conclusions by the rule making body ICAI:
1. Auditor independence being a major concern. The said firms are also providing non audit advisory services to their audit clients being non compliance to standard rules and regulations. Some of the services are indirect in nature but it compromises with the assurance function.
2. Lack of proper audit procedures to verify ICFR – internal control over financial reporting on revenue transactions wherein weak financial controls were observed in revenue side and it’s reporting more often is on estimated basis.
3. Related party transactions again is a major area of concern. No verification procedure followed for end use of loan given to it’s subsidiaries and management claim of arm’s length transaction with related parties remains doubtful but clean report being issued.
4. Major impairment in non financial assets are generally ignored in audit procedures which in long run might hamper the going concern status but still unverified and unreported.
5. As SA 620 no evaluation done for competency and capabilities of expert involved.
6. EQCR- Engagement Quality Control Review to be a separate function in compliance with Sec 141(3)(e) and 141(3)(f) of the Companies Act but normally carried out with audit work not in compliance with audit standards and independence.
7. Finally audit documentation is a routine concern to justify audit procedures followed.
So we find that lapses as pointed out by NFRA are more or less having same issues which are continuously being ignored by auditors.
Here it is relevant to point out that regulating body ICAI should come out with program, check list, questionnaire and audit procedures to be a part of audit report so that documentation and related party transactions reporting become part and parcel of the audit report itself.
A separate and mandatory audit report should be designed in such a manner to bring out relevant reporting points with documents as annexure signed by management and auditor like in Bank audit LFAR.
ICAI should arrange more programs and mandatory certificate courses on audit documentation and audit procedures rather focussing on innovative areas. The important point here is that without strengthening the core areas of audit, the use of technology is of no use.
NFRA is pointing again and again that if auditor does not know which areas to verify or how it is verified or what are the documents to rely and kept as record, it is rather waste of time to depend on technology. So it’s high time that ICAI should realise to strengthen the core areas of audit and making extensive reporting a part and parcel of audit report to save auditor of lapses.
Read:
NFRA Finds Unresolved Issues in Walker Chandiok’s 2023 Audit Inspection
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